A R3500 Can of Worms

We seem to be inextricably moving towards the implementation of a national minimum wage in South Africa. While this discussion has been going on in the background for some time, it gained momentum this year as it was lumped into the broader issue of “labour reform”. It is clear that some sort of labour reform is necessary to deal with SA’s high level of income inequality and its position as a world leader in unemployment. However, minimum wage legislation will prove to be another economic headwind for the country and a gift to populist parties like the EFF.

“Labour reform” has been highlighted by S&P as a key factor in determining whether it is appropriate to downgrade SA to sub investment grade. Everyone honed on to the issue of a “secret strike ballot” as a way to reduce strike activity. A “secret strike ballot” means that the majority of union members have to vote in favour of a strike for it to proceed. This seems like an obvious requirement but it is contentious.

The secret strike ballot has been under negotiation for a number of years but has failed to progress as unions have been opposed to its introduction. With SA trying to avert a ratings downgrade the secret strike ballot was portrayed as the key labour reform which was going to improve industrial relations and reduce the number of days lost to strikes. This was going to be presented to the rating agencies as a sign that structural reforms are progressing. However, it was impossible to get the unions on board and it appears that the minimum wage issue was fast tracked as a form of quid pro quo. I believe that this will prove to be a very bad trade off.
The importance of a strike ballot in SA has been overstated as it will not solve the problem of illegal strikes, violence and intimidation. The minimum wage on the other hand will have a profound effect on the country. The task team for a minimum wage today put forward a proposal of R3500 per month. There is much research and debate on the effect of a minimum wage on unemployment, but anyone who is familiar with economic analysis and forecasts will know that one should place very little emphasis on results. Around half the SA population earn below the proposed minimum wage. This mean means that the effect on wages and employment will be dramatic once fully implemented.

sa-median-income

As the minimum wage issue has come to the forefront in recent months the discussion has centred on the correct level and the economic impact. My concern is the much greater impact on politics and society. South Africa’s circumstances are somewhat unique given its history. We have amongst the highest levels of income inequality in the world and it is delineated by race. We have seen this discontent be expressed in increasingly militant ways by the EFF, AMCU and more recently the “Fees Must Fall” movement. The EFF have already rejected the amount of R3500 as too low and have called for a minimum of R4500.

average-income-by-race

Once the national minimum wage framework is in place, it will be easy for the EFF to base their election campaigning on the promise to increase it. The minimum wage number that they propose will be a powerful emotional anchor. Everyone earning below that level will see the EFF as fighting for them, while the ruling ANC will be perceived to be content with widespread poverty.
Regardless of what level the minimum wage is set at to begin with, I think it will turn out to be an economic and political calamity. In economic terms, the unequal structure of our society will result in consistent upward pressure on the minimum wage regardless of the economic impact. In political terms the EFF will initially be the main beneficiary of this framework as they use the initial R3500 as tool to attack the ANC. In the long run we will see populist parties attempt to trump both the ANC and EFF with even higher demands.

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