WORKSHOP ON THE NATIONAL MINIMUM WAGE

PARLIAMENTPORTFOLIO COMMITTEE ON LABOUR

 

WORKSHOP ON THE NATIONAL MINIMUM WAGE

5 SEPTEMBER 2014 

PRESENTATION BY

 GERHARD PAPENFUS

CHIEF EXECUTIVE OF THE

NATIONAL EMPLOYERS' ASSOCIATION OF SOUTH AFRICA (NEASA)

Honourable Chairperson, Honourable Members of Parliament, ladies and gentlemen.

 1I don't think that there is anybody here today that could be against good wages as such. Nobody can be against the principle of proper remuneration and honest reward for an honest day's work or with a remuneration arrangement which could improve the standard of living of workers.

2However, what we need to understand in order to deal with this issue is this: Will a national minimum wage come at the price of jobs? Will a national minimum wage reduce inequality or enhance it?

3The ever increasing gap between the wealthy and the poor is a concern to everybody who cares about South Africa and its people. In an ideal South Africa there would not have been unemployment and poverty. This is however not an ideal world; in fact very far from it. We all know that the challenges in these areas need this nation's priority attention. Where people differ is the manner in which to address these challenges. If we get this right, if we are able to find a balance between protecting vulnerable workers, without the negative consequence of increased unemployment, we would have achieved something which is seldom, if ever, achieved.

 4However, a wrong minimum wage approach will destroy jobs, increase unemployment and consequently increase inequality. By the time we realise that or recognise and admit our mistake, it might be very late in the day, even impossible to turn back the clock.

5What complicates this discussion is the fact that I do not know what is possibly envisaged with a minimum wage. Should it be on a level which is not harmful to employment levels, I would not be opposed to it. The basis of this presentation is therefore based on the premise that a minimum wage would be harmful or impact negatively on employment.

 6There are those who believe that a free market approach is the only answer to the challenges of unemployment, poverty and inequality. There are others however who believe that an unchecked free market is not the answer, who are growing impatient with the pace of transformation and the inability of the free market dispensation to produce the result which they desire, and therefore believe that state interference is needed in order to achieve the required result.

7Those who believe in less control and less interference, believe that high economic growth will eventually lead to increased employment and increased levels of earnings. 'A rising tide lifts all ships' as JF Kennedy said, illustrates this approach. The stronger the economy, the more jobs it creates and the more everybody, the poor, the middle class and even the more wealthy, benefits. The free market approach to a larger extent leaves it up to the individual to improve him-/herself. The free market approach is set on the premise that personal improvement is the only way in order to sustain a higher level of individual development.

 8This approach however does not bring immediate results, and is also an approach that tends not to benefit those who fail to develop their own skills. Another point of scepticism is the potential abuse of workers.

9State interference in the form of a national minimum wage has certain potential pitfalls.

 10One argument in favour of a high minimum wage is that it will have a knock-on effect and stimulate demand in the economy. This, however, if it will happen at all, would take time to reflect. Therefore, in the short term, although it will increase an employers' wage bill, it will not be met by the same increase in demand. There is also no guarantee that increased pay would be met by increased productivity. This will drive up cost and will have a negative effect on consumer spending which ultimately leads to job losses.

11This approach relies on the dynamics of the free market to eventually absorb the impact of an unrealistic statutory minimum wage on the market.However, there is simply no guarantee that it will happen; therefore, the sudden introduction of an unrealistic minimum wage and the potential increased demand would be too far apart, resulting in jobs being shed during that period.

12The question is not whether wage increases, which are not accompanied by increased productivity and increased demand of products, will destroy jobs, but how many jobs will be destroyed, and how to weigh up the cost of job destruction and unemployment against the benefits of higher wages for those employed. The moral principle which needs to be addressed, is the unacceptability of high wages for those few who are fortunate to be employed versus the alternative of higher employment but at a lower wage. The consequence of a model of high wages and low employment is that ultimately consumer spending power is limited because of the dependency of a large number of dependants on the income of a single breadwinner.

13Raising the price of anything, while holding other variables constant, always reduces consumption. For instance, a tax on alcohol is levied to discourage consumption. Similarly, a national minimum wage, established on a level unrelated to productivity and demand, will inevitably lead to job losses.

 14When anyone forces business to pay employees more than what they can produce in terms of their skills level and productivity, employers tend to respond by either hiring better skilled employees - which closes the door to the employment market for those insufficiently educated, skilled and experienced - or replacing jobs with automation.

15The higher the statutory wage, the less accessible the labour market will be for unskilled people and therefore those in need of skills development.

16As a case in point, I wish to focus your attention to two very important industries in South Africa.

 17The first one I want to refer to is the Metal and Engineering Industry.

 18Over the last three decades the Metal and Engineering Industries Bargaining Council has established wages for that Industry which were completely unrealistic. In fact, the minimum wage for that Industry is now approximately 40 percent higher than the minimum wage applicable to the second most expensive industry in South Africa.  

19As a result the Metal Industry has shed more jobs than any other industry in South Africa. Over the last thirty years the Metal Industry has lost 700 000 jobs. In the last five years alone the Industry has lost 250 000 jobs. The employment levels of the manufacturing sector, which has lost a further 59 000 jobs in the second quarter of this year, is now at the same level that it was in 1972. In the meantime our population has increased from 22 to 53 million people.

20In this Industry, the door of employment is closed for young and less skilled people.

21A second example is the Clothing and Textile Industry. Market unrelated wages in this Industry, established by the Bargaining Council for the Clothing Industry, has put a great many employers out of business and many more workers out of jobs. When wages were established on a level where it was no longer possible to compete with China, companies simply went out of business. This has caused tremendous hardship especially for rural communities for which no alternative opportunities exist other than the clothing manufacturing industry.

 22The point I am making here is that the 'market' is the only ‘institution’ which can establish a sustainable wage.

23If anybody interferes with this market arrangement and prescribes a wage to the market which the market (or employers) cannot afford, it will respond in a particular way, i.e. reduce staff, mechanise or close down. Government can prescribe a minimum wage but it completely defeats the purpose if that leads to increased unemployment and therefore increased poverty.

 24There is one thing you cannot force an employer to do and that is to employ.

 25Thomas Sowell makes a very important statement when he says that 'there are no solutions; there are only trade-offs'. A government can establish a minimum wage, but unless the employer gets a particular return, both in terms of productivity and demand of goods, it will result in increased unemployment.

26In South Africa, where unemployment has to be very high on the national agenda, we must concern ourselves with the labour-intensity of economic production and growth. The promulgation of minimum wages, which is not in line with what the market dictates, is already and will be even more tragic for the millions of unskilled, unemployed South Africans, whose only hope of regular employment is in a more labour-intensive growth approach.  

27Unemployment, poverty and inequality will only be eradicated by the introduction of a new approach, by both employers and employees, in the work environment. We will have to become internationally competitive. We will have to create millions of jobs. Cosmetic changes may satisfy immediate popular demand, but in the long term it will not be sustainable, and by the time it proves to be no longer affordable, South Africa will face an increased dilemma, even larger than what we are currently experiencing. In addressing unemployment, poverty and inequality, we must make sure that we build on rock and not on sand.

28I wish to conclude this presentation with the appeal to government that a national minimum wage, if that is indeed the route that government wants to take, needs to be fixed at a level where new entrants to the labour market can be absorbed at an affordable and sustainable cost and that a healthy trade-off between a minimum wage and employment be maintained at all times.

29Government will need a huge amount of wisdom in addressing this issue. I thank you for this privilege.