Minimum Wage and Social Grants: Throwing Money in the Dark?

Full-time domestic workers in urban areas in South Africa will be getting some “relief” from an increase in the minimum wage, reported eNCA two weeks ago. The new rate will become effective from today, 1 December 2015, seeing pay rise “from about R2 065 to...

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Full-time domestic workers in urban areas in South Africa will be getting some “relief” from an increase in the minimum wage, reported eNCA two weeks ago. The new rate will become effective from today, 1 December 2015, seeing pay rise “from about R2 065 to over R2 230” [1]. To put into perspective of potential reach, domestic workers make up 6 to 8% of South Africa’s workforce. Naturally, free-market leaning persons have raised the concern: Will this not just lead to more job losses in the long run? “According to a report by the City Press, research into a potential national minimum wage shows that – no matter how low the wage is set, it will cost South Africa jobs, in a market where over 8.4 million people are unemployed” [2]. According to the World Bank, “some 7.7 million people – about 22% of the working-age population – were unemployed or had stopped looking for work by 2014. The unemployment rate (on the narrow measure) was 25.4% or, if discouraged workers are included, the unemployment rate was closer to 34%” [3].

This runs contrary to the ideals and demands of leftist organisations such as Cosatu and the EFF, who are both calling for a far higher national minimum wage. Cosatu are calling for a national minimum wage of between R4 500 and R6 000. The EFF want to establish a national minimum wage of R4 500 in 2016. The absurdity of these demands is patent. Setting the national minimum at R6 000 would result in at least 65 000 job losses [2].

In the short term though, a pay rise, like the above mentioned regarding full-time domestic workers, may not be so harmful. The same research has shown that a low minimum wage could still boost the economy by about 0.2% [2]. “Giving R300 or R400 extra to someone via a minimum wage might provide a little help for those who already have a job,” said DA shadow Minister of Labour, Ian Ollis. However, he argues that this debate effectively ignores the 8.4 million South Africans “who sit on the side of the road in Alexandra, Ekhuruleni or Mamelodi every day looking for work” [2].

In fact, for many people, the minimum wage is an irrelevant debate. Alongside the unemployment and economically inactive, up to 60% of South Africa’s workforce earns less than R3 000 a month [2]. The Pietermaritzburg Agency for Community Social Action (Pacsa), recently found that South Africa’s poor are living on about R7 a day (about R210 per month). “The bare minimum cost of living (survival line) for a family of four exceeds R5 500 a month” [2]. Taking into account the fact that, in the case of domestic workers, 75% are the sole-breadwinners in their family, one can see that a minimum wage of R2 230 hardly meets any estimate for a dignified living [4; 5]. Pacsa claimed that the minimum wage should be R8 000 “if we are [to] talk of the possibility of accessing a basic life of dignity” [2].

Observing the case of domestic workers, anyone who pays their domestic worker part-time, R125 per day, may still then be contributing to a monthly income of R2 706 [6]. A recent survey by News24 with 12 000 respondents found that on average, the only province paying their domestic workers less than R125 per day was the Northern Cape [7]. That was as of September 2015, before the announcement of the full-time wage increases. Although domestic workers in the Western Cape, the highest paid, earned on average R189 per day, this still falls below the R250 a day required to earn at least R5 410 per month. (If you currently employ a domestic worker, go check out News24’s wage calculator.)

Who stands to really benefit or lose from the minimum wage, when ideals of dignified existence are out of reach?  Econ3x3 reported, “Contrary to the experience in agriculture, minimum wages in other sectors in South Africa have not had a negative effect on employment. However, there may have been other consequences, such as a reduction of the number of hours worked. In general, the effects of minimum wages are more varied and perhaps unpredictable than one might expect from a standard economic analysis” [8]. One industry hit badly as seen in their analysis was the taxi industry.

DA’s Ian Ollis “stressed that the DA is not against minimum wages, but it must be sector specific to curb job losses in marginal industries such as textiles and, more recently, steel, as well as those where rapid increases will lead to job losses such as agriculture, security services and domestic work” [2]. Ollis represents a moderate position along the hard lines of the debate. If averages on News24’s self-selected survey of 12 000 shows anything in defence of the free-marketers, it is that people will naturally pay workers more if they can afford it. The final evidence though, is of want. Will domestic workers in the Northern Cape lose jobs, while those in the Western Cape, Gauteng, and KwaZulu-Natal on average already earn more than the new minimum [7]?

When jobs are lost, where do people go? They may become dependent on another who earns less than both of them could together at a lower wage, or become dependent on someone earning social grants. “25% of the unemployed derive income support exclusively from the grant income of other members of their household” [9]. And that number is likely to be higher, depending on the measure of unemployment or estimation of population size [10]. There is ongoing concern about whether South Africa’s social grant system is even sustainable. This issue has also received proportionately less attention than that of the minimum wage. If you look at the Google hits for [“social grants” AND “South Africa”] versus [“minimum wage” AND “South Africa”], you will find about 2 270 versus 64 100 news articles respectively. From the horse’s mouth, in 2011, President Jacob Zuma said that government “cannot sustain a situation where social grants are growing all the time and think it can be a permanent feature” [9; emphases added]. Despite this, social spending has not decreased. “According to research that has compared the government’s expenditure on social grants and civil service remuneration since 2008 with government revenue over the same period, these will absorb all government income by 2026 if current growth trends are not adjusted” [9].

“South Africa currently spends over 4% of its GDP on social grants. World Bank statistics from 2009 puts South African social expenditure on a par with Ukraine, but below Malawi and Ethiopia (about 4.5%) and far behind Mauritius (nearly 8%). This is still at the high end of the scale, with Jamaica (below 1%), Poland (just over 1%) and Argentina (1.5%) being much more typical” [9].

As mentioned, the evidence is of want, these are often very long term trends. American economist Thomas Sowell has argued that increased minimum wages and social grants (welfare), have been two of the primary mechanisms that have bred dependency and collapse in African American and other communities, such as Detroit. He recently wrote, “You can check this out for yourself. Go to your local public library and pick up a copy of the distinguished British magazine the Economist. Whether it is the current issue or a back issue doesn’t matter. Spain, Greece, and South Africa will be easy to locate in the table near the back, which lists data for various countries. Just look down the unemployment column for countries with unemployment rates around 25 percent. Spain, Greece, and South Africa are always there, whether or not there is a recession. Why? Because they have very generous minimum wage laws” [11].

When we think dependency, there are two angles; Thomas Sowell is often quick to address psychological dependence. Intuitive, but often unpalatable, people who are simply not working are not getting any better at working. I would like to focus on the point of economic dependence though, as above. If minimum wages push people out of jobs, and expenditure on social grants increases, the employer is still having to pay even if s/he is no longer able to afford minimum-wage staff, and that is through tax. Why be dependent on someone, who is already dependent on the state, when you could earn, alongside, something less than minimum wage? The statement feels unpalatable and unempathetic, but remember that 25% of the unemployed depend exclusively on social grant money from other household members, in households without any labour participation. “The share of households with no link to the labour market has risen sharply, from 30% in 1997 to 42% in 2008” [12].

The (radical) free-marketer and libertarian in me sympathizes with those who would scrap the minimum wage and reduce tax burdens. Such as in the Western Cape, Gauteng, and KwaZulu-Natal: Where people can afford to pay more, they do pay more. Such a radical change in the organisation of employment, though, would likely destabilise the livelihoods of hundreds of thousands of South Africans; it is a flattering view on human nature straight out of the gate.  At the same time though, any further increase in social grants and minimum wages will only further drain the ability of the employer to hand over a dignified wage, even after s/he has had to lay off workers. Furthermore, any money entrusted to the South African government, especially outside of the DA run Western Cape, is likely to be thinned out through bureaucracy and corruption [13].

The world does not often work in radical changes, but problematically, we tend neither to notice how radical changes occur over timespans when we are not watching. Even if we were an ideally structured socialist utopia, could you trust the government to run it? Would you rather assist someone yourself, or do you prefer government strategies to distribute your and others’ wealth “fairly”? The case for most people is probably that the answer lies somewhere in between. But one common denominator is a government we can trust not to just coerce and throw money impending dooms, and not to take staggering amounts off the side before the volley [14].

Let me close with a reiteration and extension of the quote from Ian Ollis, DA shadow Minister of Labour [2]: “The national minimum wage debate does exactly the wrong thing. It attempts to ease our consciences appearing to do something for the poor, when actually we are just making it more difficult for those 8.4 million unemployed people to get jobs, or just plain ignoring them completely”.

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