South Africa’s Minimum Wage Bill: Is it good for employment?

Late in 2018 the President of South Africa, Mr Cyril Ramaphosa, signed the minimum wage bill effective 1st of January 2019. The bill stipulates that the minimum wage for employees in South Africa will be R3500 per month. There have been conflicting sentiments in reaction to the signing of the minimum wage bill some grateful and others claiming that the minimum wage is too low (Lindeque, 2018). However, the inevitable question is: Is this a progressive bill for the economy as a whole? In this regard researchers (Herr, Kazandziska, & Mahnkopf-Praprotnik, 2009) argue that changes in minimum wages may theoretically open up the opportunity for amongst other poverty reduction, but this may not necessarily materialise in relation to income distribution and price level.  In this paper, the researcher intends to focus on the potential effect of the minimum wage bill on employment in South Africa. In particular, this view will be informed by what can be referred to as the well-known Keynesian framework (Keynes, 2018). The researcher wishes to pronounce that it is by no means clear what the real long term effect of the minimum wage bill will be on employment – this is just a brief theoretical analysis. 

Nguyen (2012:2) indicates “minimum wages are the lowest hourly, daily or monthly wage that a government requires employers to pay to employees.” For the author, it seems the rationale of countries to increase minim wages for employees, is motivated by the intent to reduce poverty and consequently to improve workers’ living conditions. While this may be a noble course, will this do South Africa well as a country?

Diagram 1 Employment Effects of Minimum Wages in the Keynesian Paradigm (Herr et al., 2009)

The diagram shows the employment effects of minimum wages within a Keynesian model (Herr, Kazandziska, & Mahnkopf-Praprotnik, 2009).

The Keynesian model analysis would assume that the increase in the minimum wage to low-income households will lead to higher consumption especially on necessity goods, thus increasing the Aggregate Demand in the economy in the short term. This will automatically lead to an increase in production and supply which could have a positive turn of events for any economic context in the long term. In the absence of technological innovation, minimum wages could impact positively on employment (though this might involve informal/casual workers), in order to meet the production demands. Other positive spin-offs could include single households to being elevated above the poverty line and therefore impacting the economy positively.

Another possibility of minimum wage implementation is the increase of wages for low-income groups (assuming they employed in the production of goods), the price of those affected production lines will increase accordingly. However, one of the unintended consequences would be an increase in inflation rates.

Research asserts empirical evidence of many countries, over long periods of time, have not been able to show any clear relationship between minimum wage implementation and the rate of unemployment:

  • Card (1992:22) in evaluating minimum wage effects implemented between 1987 and 1989 in the United States of America, found that there insignificant correlation between minimum wage implementation and employment
  • Stewart (2004) studied datasets stemming from UK’s April 1999 minimum wage introduction and found no significant effects on employment
  • Dickens and Draca (2005) found no significant correlation between minimum wage implementation and employment when the UK implemented minimum wages in 2003

In conclusion, South Africans, in agreeing to the implementation of the minimum wage bill, have embarked on a journey which may alleviate poverty of low-income workers, whilst not necessarily impacting employment levels (either positive or negative).  However, in reference to the latter,  employers may opt to lay off of employees, intending to minimise costs, instead of inflating the cost through to consumers – the employers are likely to apply for the exemption that is allowed by the minimum wage bill (for employers who are unable to meet the minimum wages as stipulated).

For small businesses owners and entrepreneurs alike, the option to employ casual workers will be a more feasible option, both from a cost point of view as well as from an operations point of view (administration involved in following due processes regarding the exemption requirements). It must also be noted that the implementation of the minimum wage bill could, in the long run, result in increases in price levels.  As such South Africans will also need to entrust the Reserve Bank to continue with their inflation-target policy.

Written by Tshepho Langa

References

Card, D. (1992). Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage. Industrial and Labor Relations Review, Vol. 46, 22.

Dickens, R., & Draca, M. (2005). The Employment Effects of the October 2003 Increase in the National Minimum Wage. Discussion Paper no. 693, Centre for Economic Performance.

Draca, M., Machin, S., & Van Reenen, J. (2011). Minimum Wages and Firm Profitability. American Economic Journal: Applied Economics 3, 129–151.

Herr, H., Kazandziska, M., & Mahnkopf-Praprotnik, S. (2009, February). The theoretical debate about minimum wages.

Keynes, J. M. (2018, December). The general theory of employment, interest, and money. Cambridge: Palgrave Macmillan. Retrieved from https://cas2.umkc.edu/economics/people/facultypages/kregel/courses/econ645/winter2011/generaltheory.pdf

Lindeque, M. (2018, May 30). www.ewn.co.za. Retrieved from Eye Witness News: https://ewn.co.za/2018/05/30/mixed-reaction-from-unions-workers-on-passing-of-minimum-wage-bill

Nguyen, C. (2012, February 18). Do Minimum Wage Increases Cause Inflation? Evidence from Vietnam.

Stewart, M. B. (2002). The Impact of the Introduction of the UK Minimum Wage on the Employment Probabilities of Low Wage Workers. Journal of the European Economic Association, 2, 67-97.