Minimum Wage Question 11

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A dozen questions about the National Minimum Wage


Question 11 of 12

11. What about the macroeconomic effects of a large rise in minimum wages?


Although it mentions them in passing, the Panel does not endorse (or repudiate) the claim made by the NMWRI to the effect that an NMW of R3,500pm might actually raise economic growth. The NMWRI obtains this effect, the Panel reports, because its model “allows for positive benefits from the implementation of a minimum wage through productivity increases in workers, and positive externalities from the greater income share of labour.” The equations and mechanics of of NMWRI’s model are reflected in the Panel’s report, so it is not clear how this result is achieved. It is likely to rely on a presumed increase in aggregate demand attendant on higher incomes for the working poor, though this, of course, would depend on increased household incomes not being offset by similar losses elsewhere in the system through job destruction or lower incomes for non-poor consumers.

Although the report records no submissions on the potential of an NMW to impact negatively on GDP, it is hard to see how the estimates of large-scale job destruction presented by the DPRU and the National Treasury (see Question 8) would not also imply a negative effect on aggregate demand and economic output. This will not be proportionate to the decline in employment, however, since it is low-wage, low-productivity workers whose jobs will be destroyed.

Nevertheless, given the scale of job losses, there is likely to be some significant disruption in economic activity in several sectors, with an implied risk of lower (and perhaps negative) growth. Reduced economic growth would have adverse effects of its own: if, for example, GDP declined by 2% relative to its pre-NMW trajectory, the ratio of SA’s debt to GDP would rise, with implications for the cost of borrowing, interest rates, etc. In addition, tax revenues would fall, making it harder for government to sustain both its pro-poor spending and its investment in human and physical capital, and necessitating adjustments to fiscal policy and spending plans. These effects would not necessarily apply, of course, if all firms were able to adjust to the NMW by raising productivity, but, as discussed in Question 9, even the Panel appears to accept that some firms will not be able to do this.

Intriguingly, the Panel presents no argument or evidence about an issue that one might have expected to appear in a report proposing a big wage increase to a large proportion of all workers: whether or not this will simply result in higher inflation. This is a striking omission given the concerns that are often expressed by economists and policy-makers about the lack of competition in the economy and the resulting pricing power that many firms and industries enjoy.

Is it more likely that retailers, hairdressers and taxi bosses, for example, will absorb the full effect of an increase in wage costs, or that they will pass at least some of these on to consumers? Producers of tradeable goods might be less able to do this unless they can secure increased protection from foreign competition, but even without this, there will be many firms and industries with some capacity to pass on higher wage costs. Many services, for example, face no meaningful international competition.

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