Minimum Wage Question 9

 
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A dozen questions about the National Minimum Wage

 
 

Question 9 of 12
 

9. Are the employment effects of the Panel’s proposal really unknowable?

 

The mere fact that the Panel provides no clear answer to the key question about the potential impact of the NMW on employment does not diminish its importance and policy-makers need to consider all the risks. If they did so, they would likely find that the Panel’s view that an NMW of R3,500pm will have “benign” effects on employment is not compelling. Indeed, some of the Panel’s arguments recognise this, whether implicitly or explicitly.

As pointed out in Question 7, the Panel recognises that far fewer care and EPWP workers will be employed if the implementation of the NMW is not matched by an increase in government funding of these programmes. Similarly, the Panel recognises that agricultural and domestic workers, the great majority of whom earn less than R3,500pm, are vulnerable to job losses. Beyond this, the Panel offers little explicit argument about whether similar constraints might affect other employers, but does suggest that one of the keys to making the NMW work is for firms to find ways to raise worker productivity.

The ambiguous merits of productivity gains
In a number of places in its report, the Panel emphasises that a potential beneficial effect of setting an NMW that is high relative to existing wages is that it will encourage firms to find ways to increase productivity. This is one of the reasons why it seems enamoured of the NMWRI’s projection that an NMW of R3,500pm could actually increase growth. In addition, the Panel’s report concludes with three short sections, each of which amounts to a call for policies that would promote productivity gains through (i) more effective “industrial and productivity-focused” policies; (ii) prioritising R&D expenditure; and (iii) increased spending on human, physical and digital capital and infrastructure.

The flip side of this explicit focus on the desirability of increased productivity is that the Panel also says that it was “particularly exercised by those low-skilled sectors where there is limited scope for labour productivity improvements to accommodate higher wages”. In this regard, it is clear that the Panel is worried that these sectors – agriculture, domestic work, and low-skill manufacturing – may find it harder to adapt to a higher wage environment. It notes, for example, that many low-skill, low-wage tradable industries such as labour-intensive clothing manufacture, cannot be easily mechanised. Given this, it worries that firms may struggle to adapt to a higher wage environment. It is largely for this reason that sub-minima are introduced for agriculture and domestic work and that an implementation period of two years is proposed, so that the effects of the NMW on firms can be assessed. All of this implies that the Panel understands and accepts that it is possible that some firms are not going to be able to adjust to higher wages by improving productivity, and that they may have to downsize or close as a result. The Panel appears willing to accept this risk. The key debate for policy makers in Nedlac and elected representatives in Parliament is whether this is a risk worth running in a country with one of the world’s highest unemployment rates.

There is, in any event, a more fundamental problem with the Panel’s preference for firms adapting to an NMW by raising productivity, which is, by definition, a process whereby firms find ways to produce the same amount of output using less labour.. In other words, the Panel’s “solution” to the challenges firms will face in paying higher wages, is that they should find ways to produce their goods and services with fewer workers. This, of course, would make economic activity in SA even less labour-intensive, and leave the country less able to create jobs for its millions of unemployed people. It also runs counter to the general thrust of the National Development Plan.

It is important to recognise that the full impact on employment of an NMW that is considerably higher than existing wages will not be felt immediately. Nor will it be fully apparent in the course of the two years in which the Panel proposes firms find ways to adapt without fear of sanctions for failing to comply with the NMW.

Some firms may downsize dramatically or close immediately in the face of a high NMW. Others (probably the majority) will adapt more slowly by changing their production techniques so as to rely less and less on unskilled workers who earn the minimum wage. Initially, this may be by laying off only the least productive of their existing low-wage staff or failing to replace them when they leave. Over time, however, firms may mechanise their process or find different – more skill- and capital-intensive – activities. Some may shift production to other countries such as Lesotho and Swaziland, as some firms in the clothing sector have already done.

In other words, the impact of a high NMW will be to greatly reinforce all the existing dynamics in the economy that are pushing firms to rely less and less on unskilled labour. Nor is the effect limited to tradable sectors, as the Panel seems sometimes to suggest. Partly in response to the likelihood of rising minimum wages, for example, McDonald’s in the US has begun experimenting with outlets in which customers place their orders using touch-screen technology. This would allow the firm to make do with fewer workers and, for that reason, raise the average productivity of those who remain.

The Panel clearly favours higher productivity activities and appears to view the long-term reduction of low-productivity activities as being in line with the core aims of the proposals, rather than as a potential weakness. Whether or not one agrees with the Panel’s assessment on the desirability of moving up the productivity ladder, this implies that job destruction will occur in both the short and medium terms. Immediately, because not all firms will be able to adapt to higher wages and some will have to downsize or close; and over time, as they adapt their production techniques to raise worker productivity.

The Panel therefore seems to think that job destruction is bound to occur. Why, then, does it insist that there is evidence that high minimum wages do not reduce employment?

 
 
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