At what level should a national minimum wage be set?

The rise in farm worker wages has not let to a major drop in employment. Photo by Kate Stegeman.

Eddie Cottle

31 August 2015

The struggle for a national minimum wage in South Africa has a long history, having been waged, largely by organised worker formations, since the 1930s. These efforts have taken various forms, from open class conflict to more subdued trade union representations to the various governments of the day.

Most of these representations by the labour movement to government were made for the introduction of a system that would enforce a minimum wage across all industries covering the length and breadth of the country.

After the farm workers’ revolt and the Marikana massacre in 2012- 2013, the African National Congress-led government decided to revisit the introduction of a national minimum wage, agreeing to an investigation.

But the content of the various reports of the task teams have not been made public and the rank and file members of the trade unions have not been involved in democratic processes to decide where to fix a national minimum wage.

In determining a national minimum wage for South Africa, the main consideration must be the household poverty line of R2, 648 per month (US$ 204, since the primary goal of any minimum wage policy is to increase the incomes of those at the very bottom of the wage scale and lift them out of poverty.

We should also consider that the majority of workers’ incomes are being determined solely by the employer, as 69% or 8 million formal sector workers are not directly covered by any form of collective bargaining. Only 31% or 3.6 million workers benefit from some form of collective bargaining.

The national minimum wage must therefore, by its very nature, be universal. This is so that it can enable the lowest paid workers, most of whom are women, but all workers, regardless of their location in a particular sector or industry, to be lifted out of lifelong poverty.

In many countries the national minimum wage is set using the figure of 35 to 45% of the national average wage, or or 40 to 60% of the median wage.,

According to South Africa’s Quarterly Employment Statistics, the average monthly income for the formal non-agricultural sector - total income divided by the number of earners - was R16, 470 (US$1,256) in November 2014. In South Africa, the average minimum wage, based on the average wage level, would therefore be somewhere between R5,766 (US$439) and R7,412 (US$565).

If the minimum wage were calculated as 50% to 60% of the median wage of R3, 033, it would result in a wage of R1,517 to R1,820. The median wage is the boundary between what the highest 50% of earners are paid and what the lowest 50% of earners are paid. So if the median wage in South Africa is R3,033 a month, this means that 50% of workers are earning above the median and 50% are paid below.

Clearly, using the average and median wage as the rate at which to fix a national minimum wage would either be too high (as it almost exceeds the highest minimum for all industries) or too low (since it is below the poverty line) and would leave the majority of workers trapped in poverty.

What is important is that workers themselves have their own perspective on what their needs are and what a minimum wage and a living wage should be, regardless of what certain experts may argue.

In broader terms the figure of R3,000 (US$229) in 2012 was what farm workers felt would take them out of a poverty wage and provide a minimum wage they could live on. Would it therefore be feasible to use the Labour Research Service (LRS) median minimum wage of R3,600 (US275) as a benchmark for all industries to fix a national minimum wage in 2015 or is it still too close to the poverty level?

We cannot set a benchmark for the national minimum wage without first examining the most important benchmark for workers themselves. This consists of a living wage which should be based upon any working class family being able to afford a low cost house and is called a housing-based living wage. According to LRS, a housing-based living wage is premised on the assumption that housing is the biggest item of expenditure from household income, and that a living wage can be derived from the monthly cost of housing if this is set at a particular percentage of total income.

Banks recommend that a household should spend no more than a third (33.33%) of its monthly income (after tax and other deductions)on monthly bond repayments. First National Bank’s Property Barometer for former “township” markets indicates that the average house price is R323,000 (US$24,639) in 2015. Using the bank’s bond calculator, we arrive at a monthly bond cost of R3,067 (US$234) and a qualifying minimum gross income of R10,224 (US$780) per month. This leads to a housing-based living wage of R10,224 (US$780) per month for 2015.

It thus appears that in order to take workers out of the poverty wage system inherited from apartheid, the minimum wage would have to be located somewhere between the all industries median minimum wage of R3,600 (US$275) and the housing-based living wage of R10,224 (US$780). An important consideration is that the fixing of a national minimum wage should not be set so high so that it is confused with a living wage.

If the all-industries median wage of R3,600 (US$275) is accepted, then workers covered by sectoral determinations (ranging from domestic workers to workers employed in the private security industry) and workers employed in construction, finance and wholesale and retail — about seven million workers out of the total of 11.7 million formal sector workers in South Africa — stand to benefit. The extent of the coverage depends on how high the national minimum wage is finally set between the all industries and the housing-based living wage benchmarks.

But how feasible would it be to adopt a universal minimum wage without shedding jobs and causing harm to the broader economy?

There is much concern that a high national minimum wage may increase unemployment and that there is a difference between conditions for economic sectors involved in the export sector and those that essentially serve the domestic market.

In the famous 2012 farm workers’ revolt in the Western Cape, farm workers demanded a minimum wage of R3,000 (US$229) and on the other hand the Marikana (platinum mining) striking workers demanded a living wage of R12,500 (US$955).

Of all the sectors studied (wholesale and retail, domestic workers, forestry, tax and security) researchers at the University of Cape Town found that it was only the agricultural sector where there was significant unemployment after the implementation of the agriculture sectoral determination of 2003. However, the agricultural sector showed growth and there were no economic shocks (even in exports) that could have caused unemployment in the sector’s largest employers, citrus, maize and grapes.

LRS’s findings on employment in the agriculture sector over time indicate that the largest drop in employment took place in 2001 (just over 500,000), two years before the implementation of the 2003 sectoral determination. However, employment increased again between 2005 and 2006 by 181,000 jobs and dropped steadily until a low of 627,000 in 2011 then started to increase again to 891,000 in the first quarter of 2015. This represents an increase of 20% or an additional 182,000 jobs in the first quarter of 2015 when compared to the first quarter of 2014. Employment levels thus returned to the level of 2003, when the sectoral determination was first implemented.

The drop in employment of 55,000 farm workers by 2014 is thus a very small decline given the magnitude of the increase in the minimum wage and looking at employment levels over the long-term.

The figures show that most farmers had in fact absorbed a massive increase in the new minimum wage of R105 (US$8) a day, a 50% increase (on the previous R69 (US$5) a day) in 2013.

Workers also gained tremendously with an increase in the wage bill of R1.5 billion (US$114 million) in 2013 and a further R1.6 billion (US$122 million) in 2014. However the wage determination has modestly increased real average wages and the overall wage bill was only 10.6% of total farming costs in 2013.

According to the Department of Agriculture Quarterly Economic Review, the sector registered strongest growth of 5.6% in 2014, up from 1.5% in 2013. The sector’s growth was because of the R25.1 billion (13.2%) increase in gross income from agricultural products in 2014 compared to 2013. Thus profit levels in the agriculture sector increased despite the introduction of the sectoral determination for farm workers in 2003 and the increase of 50% in farm workers’ wages in 2013.

A 2014 study by the Institute on Poverty, Land and Agrarian Studies (PLAAS) at the University of the Western Cape sums up the experience of the agricultural sector in relation to minimum wages. It shows that employment figures in the agricultural sector indicate a trend toward stabilisation of employment along with a significant shift from casual and seasonal to permanent employment, that is, both these factors are reversals of previous trends.

Experience in agriculture (an export sector) and minimum wage determinations indicate that there is no mechanical relationship between an increase in wages and greater unemployment. The simplistic argument that increased wages lead to unemployment is not supported by evidence. Instead, we observe increased employment and increased profitability. Thus, besides financial gains, farm workers have also scored a change from casual to permanent employment, including a reduction of workers’ weekly hours from 47 (2008) to 46 hours, according to Statistics South Africa.

A national minimum wage is a powerful weapon in the hands of labour to fight poverty wages and is both reasonable and necessary. Only the labour movement can make a national minimum wage a reality.

Cottle is the head of collective bargaining at the Labour Research Service in Woodstock. This paper is based on his booklet: Cottle, E. 2015. Towards a National Minimum Wage in South Africa. International Labour Organisation. Geneva. Views expressed are not necessarily those of GroundUp.