The future of legislated minimum wages in South Africa: Legal and economic insights

1 Introduction

During the mid-1950s Nobel Memorial Prize in Economic Sciences recipient, Sir W A Lewis, proposed a new theoretical model of economic development for developing countries. This model was premised on the assumptions that, first, there was an unlimited supply of labour in most developing countries and, secondly, as the modern industrial sector in such countries developed, these growing economies would be able to absorb any labour surplus.1 Rising high unemployment levels globally, however, would suggest inaccuracies in this model. Paradoxically, with unemployment levels on the rise internationally, statistics indicate that over the last 40 years the average real-unit labour costs in South Africa has increased twice as fast as that of the 30 wealthiest Organisation for Economic Co-operation and Development (OECD)2 countries. This is worrisome when considering that the youth3 employment rate revealed a drop from 16.2% in 2000 to 14.6% in 2008.4 It might perhaps be argued that these and other similar statistics suggest that “[a] policy of good jobs in principle, but no jobs in practice, might assuage our consciences, but it is no favor to its alleged beneficiaries”.5

Apart from rising unemployment levels, poverty levels of those who do have jobs in South Africa are also alarmingly high. While seemingly at odds, working poverty is the situation where working employees continue to earn such low wages that they are unable to meet basic living needs.6 High poverty levels, and the inherent inequality that comes with it, remain a great cause of concern, whether viewed from economic sustainability, social justice, or basic adherence to Constitutional7 imperatives such as dignity and equality for all.8 The situation in South Africa is nevertheless not unique. Many developing countries find themselves in a so-called middle-income trap. These countries need to find ways of bridging the gap between, on the one hand, an economic-growth model based on the exploitation of low-cost labour as a means of gaining a competitive advantage, and on the other, an economic-growth model largely dependent on capital investment and high productivity. However, bridging this gap in an increasingly globalised trading environment remains problematic. Middle-income countries find it difficult to compete with low-income, low-wage economies in manufactured exports on the one side, and advanced economies in high-skill innovations on the other.9

The above does not bode well for employees when it comes to minimum wages. For most employees, demands around increased conditions of employment, particularly increases in wages, are simply born out of their need for financial survival or for increased financial stability. Employers and trade unions across various sectors in South Africa periodically engage in negotiations on issues of terms and conditions of employment, most notably wages. Where the parties are unable to reach agreement the Constitution of South Africa, 1996, assisted by the Labour Relations Act 66 of 1995 (LRA), provide employees with the right to strike and employers with the right to lock-out. Far too often such industrial action unfortunately turns into violent displays of power (or perhaps only perceived power), even at times resulting in loss of life such as was the case in the Marikana incident of 2012 (discussed below). A contentious issue often raised in the South African context is whether, given South Africa’s social and economic climate, employee demands for wage increases are reasonable and viable. This question is partly driven by the trend to demand wage increases far in excess of the annual inflation rate.

Although no definite conclusion is likely to be reached, this article will attempt to address the following: whether legislated minimum wage levels in South Africa is a realistic, and in fact workable, option; what impact implementing legislated minimum wage levels might have on achieving the International Labour Organisation’s (ILO) decent work agenda,10 and the form that any successful legislated minimum wage level system should take.

2 Labour Market Regulation

During the mid-19th century economists in the United States of America (USA) sought to justify vast income inequalities between employees by relying on what at the time was referred to as the marginal-productivity theory. This theory was predicated on the existence of an identifiable link between higher income and higher productivity. A higher income was directly indicative of an employee’s greater contribution to society. Not surprisingly this theory was particularly cherished by the rich.11 During the latter part of the 19th century, globalisation, as understood in the modern sense,12 came to the forefront as a result of strides made in technological innovation which increased the exchange of knowledge, trade and capital on an international level.13

Subsequent to the international integration of markets and people brought about by the internationalisation of investment and colonial expansion, and the ultimate onset of the modern understanding of globalisation, businesses were suddenly, and continue to be, exposed to intense competition on national and international levels. Businesses are constantly under pressure to adjust their operations and labour forces to meet fluctuations in demand and progress in productivity.14 In an attempt to meet these rising demands, businesses often look towards a reduction in worker wages, or lower levels of wage increases, as a means of economic growth and survival. Correlations between the onset of globalisation and rising demands for increased minimum wages were therefore to be expected. This leads one to ask whether increasingly-competitive labour markets should perhaps not be regulated by designated outside forces, such as labour laws.

Labour market policies and regulation remain a highly contested area, with many supporters of both regulation and non-regulation of labour markets respectively. Those in favour of an interventionist approach advocate for regulation, mainly through legislation, aimed towards assisting a poor and vulnerable workforce. Proponents of this approach regard labour laws as any state-recognised labour rights and standards aimed at improving the quality of working lives and bargaining power of workers.15 Supporters of labour market regulation further argue that labour markets, particularly those of developing countries, are highly imperfect when no dedicated intervention takes place. One example generally used is the frequent power imbalances observed between employers and workers. It is argued that an unregulated market potentially increases the risk of exploitation and unfair treatment of workers, which in turn impacts negatively on human development and growth.16 Regulation through legislative intervention is therefore argued. Otto Kahn-Freund summarised the main rationale for labour law as “... a countervailing force to counteract the inequality of bargaining power which is inherent and must be inherent in the employment relationship”.17 It is argued that labour market regulation through rules and controls in respect of working conditions could significantly reduce exploitation of workers, which in turn impacts on overall worker productivity.18 Increased worker productivity it is held contributes towards market competitiveness and growth, which reduces the need for cost-cutting measures, such as wage decreases and poorer working conditions.19 Protection against exploitation also significantly contributes towards the achievement of the ILO’s decent work objective and constitutional imperatives, including the rights to dignity and fair labour practises.20

The true effectiveness of legal rules and policies is nevertheless often questioned, despite how effective they might look on paper. The question is largely based on the view that legal rules and policies often are not practically implemented in the informal economy and have little benefit to these workers, largely as a result of non-adherence by employers and a lack of enforcement. Considering the large number of workers employed in the informal economy where work opportunities are more readily available for poor and unskilled workers, particularly in developing countries, questions around effectiveness and practicality are well-founded. 21

On the other hand, supporters of the neoclassical school of thought advocate the increased deregulation of labour markets with a view to rendering them more efficient.22 It is argued that reforms of the legislative regime are required in order to enhance workforce flexibility. The argument largely is based on the view that workforce flexibility will contribute to increased market competitiveness, economic growth and ultimately employment opportunities. It is said that a regulatory approach, through protective legislation as example, often results in the misallocation of available resources. Regulation leads to the absence of any real flexibility to adjust wages freely to the marginal productivity of labour; a regulatory approach often prevents labour markets from spontaneously adjusting to acute economic changes and shocks; and regulation has the potential to reduce profits, which in turn could result in the reduction of investments and, ultimately, market growth.23

While arguments in favour of regulation and deregulation are interesting, in the South African context the discussion has been rendered mostly academic over recent years. Since the adoption of the Constitution in the 1990s, labour market regulation is rather firmly embedded into South African employment law by virtue of various statutes and related pseudo-legislation such as sectoral determinations. Labour market regulation largely is divided into the following sub-categories: minimum conditions of employment; collective bargaining and worker participation; dispute resolution and adjudication; promoting equality in the workplace; skills development and placement within the labour market; and employment linked social security.24 Legislated minimum wages are regarded as a form of minimum conditions of employment.

3 Arguments in Favour of and Against Legislated Minimum Wage Levels as a Form of Labour Market Regulation

“But if a young adult cannot produce enough of value to justify being paid a living wage, nothing we do to the minimum wage will help. He, the institutions which trained him and the society in which he lives, have far bigger problems.” (Tim Harford)25

Disagreement amongst commentators and stakeholders, from both economic and legal fields, on the feasibility and impact of minimum wages as a form of labour market regulation on employment levels and economic growth is nothing new. In considering labour laws and economic principles in the same context, two inseparable views emerge. The first view holds that employees and employers play a complementary role in production and the running of a successful business. The second view holds that employees and employers, subsequent to the completion of the production process, compete with one other over the benefits brought about through production.26 In general there however seems to be agreement that labour laws must be for the good of society at large, and ensuring the availability of sufficient and decent jobs remains a collective responsibility. 27

It is however often also argued that legislated minimum wage levels do not only regulate employment relationships, but the operation of the labour market in general as well.28 As example, during the 1980s it was widely accepted that labour laws could be implemented as instruments of economic policy to, for instance, control inflation.29 Consequently modern labour law has been argued to have four main objectives: the promotion of allocative and productive efficiency and economic growth; macroeconomic management by achieving wage stabilisation, high employment levels and international competitiveness; establishing and protecting fundamental rights; and redistributing wealth and power in the employment context.30 Labour market regulation can therefore be used to enhance the employment conditions of workers, such as higher minimum wage levels.31 In turn minimum wage levels potentially impact on three macroeconomic variables: demand for goods and the growth of the economy; employment levels; and inflation.32

Arguments against legislated minimum wage levels range from those arguing against implementing any form of legislated minimum wages, to those observing that current minimum wage levels in South Africa are simply too high and therefore unattainable. It is often argued by these critics that the very employees such policies are said to assist may in fact fall prey to growing prejudice and harm as a result of these policies. In turn, proponents of legislated minimum wages remain firm in their view that increased wages play an important role in moving people out of poverty. Arguments by minimum wage supporters have largely been premised on the ideal of improved quality of life for low income and vulnerable workers.33 Finally, it has also been argued that in light of trade unions’ declining bargaining power, especially when faced with high unemployment rates, legislated minimum wage levels play an increasingly important role in the protection of workers.34

Speaking at the release of his annual South African Employment Report during May 2012, economist Mike Schussler was of the opinion that “[t]he ugly truth in South Africa is that unskilled and semiskilled workers are being overpaid, which contributes to keeping other people out of the job market”.35 This statement, however, could be criticised for its seemingly flawed premise, that is, that labour should be kept cheap, and that the job market referred to seemingly hint towards a market that exists for cheap and unskilled, or at best semi-skilled, labour. Furthermore, a fundamental question the statement fails to address is the reason why workers are still in positions of being unskilled or semiskilled. At the time the Congress of South African Trade Unions (Cosatu) also refuted the statement. Cosatu argued that Schussler had abused the statistical data used as basis for his report, the information on which his views were based was incorrect, and that he had misconceived the principle of purchasing power parity in South Africa.36

Those opposing legislated minimum wages often argue that unemployment levels potentially stand to rise as a result of significant increases in minimum wage levels.37 In a country such as South Africa, where unemployment levels are already alarmingly high, a further rise in such levels would in turn deprive individuals of an income, as well as the gaining of work experience which could in the long run affect earning ability.38 With limited employment opportunities already a reality, it is argued that workers who are regarded as being overpaid (generally low-skilled workers) through, eg, legislated minimum wage levels, prevent individuals who are willing to earn less from entering meaningful employment. As such it is argued that downward wage flexibility is important in achieving sustainable levels of employment and growth.39 It has to be noted however that while the effect of minimum wages on employment levels has been researched in developed countries, very few similar studies have been undertaken in developing economies thus far. Consequently much less is known about the impact of legislated minimum wages on employment levels in emerging economies.40 And of those studies in respect of developing countries, very few have found sufficient empirical evidence to show that a rise in minimum wages had any significant effects on the employment levels.41 In the South African context, reports and statistics on employment growth and reduction in sectors covered by sectoral determinations indicate no significant reduction in employment levels subsequent to the implementation of minimum wages in these sectors, with some even indicating a slight increase in employment levels.42

It is further argued that strictly-legislated minimum wage levels, especially those on the higher end of the spectrum, increase the financial burden on companies, many of which are already struggling under on-going difficult economic conditions.43 Part of the increased financial burden experienced by businesses is higher production costs. While of course varying between different sectors, on average labour costs remain a significant component of production costs.44 Some economists who argue against minimum wages, or wages which are set too high, rely on statistics which indicate that while internationally production costs have decreased on average, these costs in South Africa have consistently been on the rise. This remains of concern in a globalised economy where international competition remains rife and cheaper foreign labour remains freely available. Consequently South Africa is rendered less competitive on an international level.45 Yet, experiences from across Europe in cutting labour costs to lower production costs seem to suggest a different reality.

In response to increasing economic pressures many European governments implemented overall worker rights reductions as one measure to bring down labour costs. Not surprisingly cutting of wages and decreases in other employment benefits, such as unemployment benefits, were met with much hostility by both workers and trade unions.46 Such an approach resulted in a noticeable decrease in disposable household income, which led to a decline in consumer spending. This decline in consumer spending in turn negatively impacted on economic growth.47 The lowering of wage levels also negatively impacted on the living standards of workers and consequently the ILO’s decent work agenda. 48

Turning now to arguments raised by those in support of minimum wage levels, one argument with a lot of support is that, even if it was accepted that legislated minimum wage levels might result in some short-term employment loss following implementation, increased employment levels in the long run were likely to be observed. This might emerge in one of two ways. First, low wage levels might result in a so-called low-productivity trap which hinders job growth. A low-productivity trap is where employers fail to invest in their workers through, for example, payment of proper wages, training initiatives and other retention efforts, which measures are often associated with an increase in aggregate workplace productivity levels. Where investment in workers are lacking, low productivity levels are likely to be observed, and consequently business profit levels stand to be negatively affected. This in turn limits a business’s potential for growth and further employment creation. Second, legislated minimum-wage policies might also be utilised to correct market failures. Such policies could guard against wage deflation and a resultant decline in aggregate consumer spending. It is argued that, in theory at least, higher wages for employees should lead to increased consumer spending which in turn contributes towards economic growth, and as such, job creation.49 Caution should however be taken in simply linking a raise in minimum wages with a definite rise in labour productivity. A higher wage level is but one factor in a spectrum of factors which has the potential to impact labour productivity. Other contributing factors include the scale and nature of capital investment in a country, the state of a country’s training and education systems, and, perhaps less directly so, the effectiveness of a country’s legal and governmental institutions.50 Consequently, and this cannot be over-emphasised, a crucial focus area towards ensuring a country’s ability to sustain long term economic growth and prosperity should be steps taken to ensure a rise in the training and skills levels of its workforce.

The absence of reasonable legislated minimum wage levels, particularly at the level of a living wage, is likely to result in cycles of continued poverty and lack of skills. It is argued that in the absence of proper education and training, workers’ earning abilities remain limited. Yet, poorly paid workers cannot afford the further training or education necessary to increase their skills and consequently their earning potential. This inevitably raises the question as to who should be responsible for ensuring that necessary education and training take place. This article supports a view that would advocate for a tripartite responsibility, ie, the responsibility should rest on employees, employers and government alike. Employers should have the responsibility to identify skills needs in the business, particularly in light of increased technology. The responsibility of government should be to, more than it does at the moment, facilitate the development of identified skills. And finally, employees should be responsible for ensuring that they subject and commit themselves to undertake further education and training. The reality however remains that poorly-paid workers continue to find themselves in a cycle of poverty and lack of further education which, without some outside intervention (such as bursaries, grants or other third-party funding), has little prospect of ending. The situations these workers find themselves in are worsened by an era of increased technological advances, which either negates the need for manpower, or requires workers to keep abreast with ever-changing technological advancements. Individuals who remain untrained, or insufficiently trained, in technological matters are effectively prevented from working in high productivity and technologically-advanced environments.51

Legislated minimum-wage levels are also justified in the context of imperfect labour markets where employees, particularly those engaged in non-unionised informal work, such as domestic workers, remain vulnerable. It is argued that legislated minimum wage levels might protect these workers against exploitation. As example, many households which employ domestic workers consider the worth of these workers to far outweigh the wages actually paid to such workers.52 Studies in fact indicate that majority of households are willing to increase domestic workers’ wages rather than running the risk of losing these workers.53 Yet, domestic worker wage levels do not provide an accurate reflection of the valuable contribution these workers make, not only to the household economy, but the national economy through enabling their employers to work. By having a domestic worker taking over some household chores (most commonly cleaning, cooking, and child rearing), the employer has more free time available which could be used to generate further income. The income generated as such generally exceeds the amount in wages paid to the domestic worker. The financial benefits experienced by the employer, and even more so in the case of multiple income households, are rarely reflected in the wages paid to domestic workers. Data in fact shows that even as far back as the early 1990s, on average wages of domestic workers constituted, at best, a mere 4% of an employer’s salary.54 Where minimum wages are legislatively determined it will be more difficult for employers to engage in unfair low wage competition. This is off course reliant on the premise that as long as unemployment remains rife, competition over available jobs will remain high. And this is where the opportunity is created for unscrupulous employers to lower wages and provide poorer working conditions to those individuals who remain desperate to generate any form of income. Such workers would in general also be hesitant to challenge their employers’ conduct out of fear of retaliation and dismissal.55 This is of concern when considering that job security is regarded as a fundamental component of decent work.56

While there will always remain tension between regulation and non-regulation of minimum wages, in the South African context the issue is these days largely academic. Minimum wages are already regulated on a sectoral level through sectoral determinations. Furthermore, the recently-adopted National Minimum Wage Bill57 is another step towards further embedding the regulation of minimum wages in the South African employment environment. It is arguably therefore no longer a question of whether to regulate, but rather one of how to best regulate.

4 Understanding Living- and Minimum Wages in a Decent Work Paradigm

5 Minimum Wages in South Africa

Employee rights in South Africa as a topic is nothing new and has been the subject of debate for generations. Over the years many factors have influenced this debate. One such factor is globalisation and the access it provided to cheaper foreign labour with a consequent decrease in local working conditions.76 Wage demands and wage levels specifically came under the spotlight during the global financial crisis of 2007/2008, which resulted in alarmingly high levels of unemployment. Another topic often encountered in employee rights’ debates is the substantial informal economy,77 within which worker exploitation and unsatisfactory employment conditions remain rife.

For South Africa 2012 in particular was a pivotal year as far as disputes over minimum wage levels were concerned. During mid-2012 miners at Lonmin mine in South Africa commenced strike action over demands for better working conditions and increased wages (the strike was also known as the Lonmin miners’ strike or Marikana miners’ strike).78 Central to the strike action was the view by workers that “... benefits of mining [we]re not reaching the workers or the surrounding communities. Lack of employment opportunities for local youth, squalid living conditions, unemployment and growing inequalities contribute[d] to this mess”.79 The strike was riddled with violent incidents between members of the South African Police Services (SAPS), security personnel at the Lonmin mine, the leadership corps of the National Union of Mineworkers (NUM) and striking workers themselves. Headlines were made when weeks of unrest culminated in the death of approximately 47 individuals, of whom some 34 were striking mineworkers shot by police officers during a spurge of violence that took place on 16 August 2012.

The latter part of 2012, continuing into early 2013, also saw widespread strike action in the agricultural sector. This industrial action resulted in minimum wage levels for farm workers increasing just over 52% with effect from 1 March 2013.80 This was achieved through the amendment of Sectoral Determination 13: Farm Worker Sector.81 In response to the significant increase in minimum wages farmers and farmers’ organisations alike criticised government for failing to consider the impact that these substantial increases might practically have on the farming industry, especially in the long run. It was argued that most farmers would not be able to afford the payment of wages at the new minimum wage levels rates, as a result of which many farmers would have to resort to lay-offs of workers in an attempt to remain financially sustainable. Despite the aforesaid fears Cosatu, while welcoming the increase in minimum wage levels in principle, maintained that the increased wage levels still did not constitute a living wage,82 and further argued that merely contributing a fear of job losses to a particular minimum wage level was too simplistic in its approach.83 While this happened just over five years ago already, at the time of writing this article there was still no clear statistics which indicated any significant rise in unemployment levels in the agricultural sector since 2013.

6 Conclusion

Key issues that this article is hoped to have provoked some further thought on are: whether legislated minimum wage levels is a realistic and reasonable option, specifically in the South African context; whether the implementation of legislated minimum-wage levels could have a significant effect towards achieving the ILO’s Decent Work Agenda;113 and the form a legislated minimum wage level system should adopt in order to have any chance at success.

As indicated there remains a clear divide between proponents advocating for minimum regulation and those who advocate for freedom of markets without unnecessary outside interference. Whilst there seems to be equally-valid arguments for both regulation and non-regulation, the general consensus internationally, at least at the time of writing this article, seems to be that the advantages of some form of regulation of minimum wages outweigh the risks or restrictions attached to such regulation.

It seems trite that an economy within which the financial position of the majority of citizens is constantly deteriorating is unlikely to do well in the long run.114 One cannot therefore ignore the advantages and disadvantages legislated minimum-wage policies could have on economies. Considerations around legislated minimum-wage levels took on a further level of complexity in face of the global financial crisis experienced in 2007/2008. During the early days of the crisis many governments opted for a recovery approach within which purchasing power and aggregate demand were maintained as key elements towards economic recovery. However, as the crisis increased in intensity, wage cuts as a result of both collective bargaining and unilateral cuts by employers were increasingly observed, which resulted in an overall decline in wage levels and a resultant decline in aggregate demand.115

Issues of relevance to the ILO’s Decent Work Agenda, such as providing a living wage, therefore continue to be prevalent, yet difficult to address. As a result, whilst basic economic theory predicates that the productivity of an industry should be a final consideration in wage determination,116 many unions argue for a return to social movement unionism.117 The concept of social movement unionism has been a topic of much research for years, and can generally be described as:

“a highly mobilized form of unionism which emerges in opposition to authoritarian regimes and repressive workplaces in newly industrializing countries of the developing world, and which is based in a significant expansion of semi-skilled manufacturing work. SMU is embedded in a network of community and political alliances, and demonstrates a commitment both to internal demographic practices as well as to the broader democratic and socialist transformation of authoritarian societies.”118

It might be argued that social movement unionism is in fact a key concept in the search for forward-thinking solutions as to how policy changes in the area of wage-determination could be set in motion and ultimately become successful. Social movement unionism asks, not only of trade unions as understood in labour law, but of a range of role-players, to address wider community issues such as education, skills-development, and employability. From a South African perspective, an on-going restraint in socio-developmental initiatives is the prevailing shortage of critical skills in many sectors.119 As example, trade unions, as part of social movement unionism, might therefore want to investigate how labour movements could possibly address these shortcomings. In short, social movement unionism not only concerns itself with employment rights and the organisation of workers, but rather engages in a far wider political struggle for the achievement of human rights, social justice and values that underpin any democratic society in general.

Through issues highlighted in this article, yet without attempting to suggest any concrete recommendations or solutions, it seems as if any attempts to achieve overall living standards in line with a living wage ideal is likely only to be achieved through a combination of legal, economic and social movement interventions. As previously argued by Cosatu, actions to close the gap between minimum wage and living-wage levels should focus on core policy interventions aimed at, amongst others, (i) ensuring access to education, skills and human resource development aimed at redressing existing labour market deficiencies; (ii) access to cheap, reliable and safe public transport system(s); and, finally, (iii) the implementation of a national retirement scheme.120

Ultimately it seems to come down to the following question: Is it possible to introduce a system of legislated minimum wage levels which will have the power to provide employees with what could be regarded as, a living wage, without fuelling unemployment levels and impacting negatively on economic growth and job creation?121 As with many issues pertaining to law and economics, this is clearly not an easy question to answer, and there is definitely no blueprint (yet) for any successful system. In pursuing the ideal of social movement unionism, an economy requires collective action from different stakeholders, most notably governments investing in infrastructure, education and technology.122 It has therefore been said that regulation could be achieved not only through law in itself, but also through other mechanisms aimed at the achievement of social policy goals. Consequently, regulation should not only focus on specific sets of rules, but also on all state interventions and actions, as well as non-state social controls or influence, such as markets. 123

Perhaps the answer does not lie in a single, strictly-controlled system, but rather the implementation of an out-of-the-box strategy or strategies. Whilst developing such a clear one-size-fits-all minimum wage system model will undoubtedly be difficult, perhaps even impossible, a first step might be to investigate implementing an easily-adaptable system, and one which is firmly embedded in the below non-negotiable values and principles:

• Any minimum wage should be set at a level which, based on country specifics, would be regarded as a living wage;
• Minimum-wage levels must be set at levels which will not lead to a rise in unemployment levels;
• Economic growth and job creation should not be negatively impacted by the minimum-wage system and decided wage levels; and
• Training and skills development of individuals should be a focal point in any minimum-wage system, which obligation should not be placed on the shoulders of individuals alone, but declared a shared obligation between individuals, employers and provincial and national government(s) alike.

It is hoped that this article has provided some valuable and clear insights into the multi-dimensional sphere and complexity of minimum wages and issues related thereto, and as such laid a basis from which more studies which could provide further insight into the topic might be undertaken.