Minimum wage debate: the old cheap labour system will get us nowhere

In response to our and Neil Coleman’s articles on national minimum wages, Jeremy Seekings and Nicoli Nattrass trumpet the tune they’ve played for years without taking seriously the arguments advanced.

Seekings and Nattrass distort the debate, asserting that Coleman ‘wants a new system whereby a national minimum wage is set without worrying about employment effects’, contrasting this to free marketeers who reject all prescribed minimum wages, and casting their own position as the sensible middle road. But in fact, not even big business is pushing for an absence of any wage regulation, and the position of Seekings and Nattrass fits squarely into the pro-business orthodoxy that we challenge.

We do not argue that the minimum wage should be set without taking account of the present structure of the economy, including consequences for employment.

However, we do show – both empirically and theoretically – that there is no rigid mechanical link between increased wages (or a higher minimum wage) and rising unemployment; Seekings and Nattrass, without substantiation, impute the opposite. Further, we argue that ditching low wages and - as their cause not their consequence - low investment, low productivity and low employment, requires a fundamental restructuring of the South African economy.

The economy that Seekings and Nattrass seem to envisage – judging by their approval of Mauritius’ low-wage growth model of the 1970s and of low wages in sectors such as agriculture and clothing and textiles – is based on low wages.

This position is untenable for three reasons.

First, growing civil unrest and increased tension in labour relations indicate that South African workers, not unreasonably, will no longer accept this model, upon which the economy was built, but which has spectacularly failed to generate employment and decent livelihoods, with unemployment growing from the 1970s. Related to this is the moral argument that workers simply should not be paid starvation wages.

Second, the low wage model implies a global race to the bottom in which each country slashes wages in order to compete with the others, resulting in a vicious downward spiral.

Third, in suggesting that in an era of global competition wages are the decisive factor driving investment and job creation, the model flies in the face of the evidence.

Turkey’s clothing and textiles sector, for instance, consistently outcompetes South Africa’s, though Turkish wages, in 2011, were 24% to 41% higher. Contrary to Seekings’ and Nattrass’ oft-repeated assertions, “excessive” wages have not caused this sector’s decline. Similarly, for agriculture, as John Sender shows, the reason for South Africa’s poor performance, in absolute terms and relative to competitors, is not high wages but inappropriate and unsupportive policies.

Seekings and Nattrass support their argument by implying that South Africa’s exports rely on low-wage sectors; this is patently false. The export sectors that have grown in recent years are not low-wage sectors, and small-scale enterprises, the chief beneficiaries of low wages, have disproportionately failed to export and create jobs. Exports are mainly of refined metal and mineral-related products, either minimally processed (coal, gold, diamonds) or highly processed (centrifuges, cars) and on agricultural or forestry related goods.

South Africa desperately needs to raise levels of investment in the productive sectors of the economy, building on sectors in which productivity can be advanced at levels that result in decent wages. The mining capital goods sector (mining machinery and the like) – which has shrunk since the end of apartheid – is a good example, as SA has both the necessary raw inputs, such as iron ore to make steel, and a large local market for the products.

For sectors which are currently not globally competitive, such as clothing and textiles, increased investment in machinery is needed, and perhaps a shift from cheap goods towards higher value-added and niche products.

Expanding domestic markets, spurred by higher wages, could underpin economies of scale and productivity increases, while local industry, in an era of fast production cycles, could leverage its proximity to the continent’s major retailers to increase exports.

What is critical is nuanced government policy providing the necessary incentives and restrictions (on metal prices, for instance) combined with direct investment in skills, research and development, and world-class infrastructure, as well as a stable, corruption and crime-free environment.

There is near unanimous agreement that borrowing to spend on infrastructure raises productivity, enhances competitiveness, and can have strong multiplier effects.

Abandoning our conservative and austere macroeconomic policies is essential to support such a programme. This means more government investment, lower and regulated interest rates, preferential financing for chosen industries, limiting financial market speculation and curbing the 10 to 20% of gross domestic product that big business is, legally and illegally, spiriting out of the country. Raising the tax intake will also be necessary, as will radical wealth redistribution.

By contrast with this, Seekings and Nattrass offer an untenable low-wage vision.

They argue that a ‘low national minimum should be set at the level of the lowest sectoral determination, and higher minima might be set in other sectors if the ‘employment effects’ (i.e. ensuing job destruction) are assessed to be modest’. This is simply a reframing of the status quo with the extremely modest aspiration of those sectors not covered by any prescribed minima – in which enforcement is the most difficult – being included at the lowest possible level. It is a proposal that experts – such as the International Labour Organisation (ILO) – have consistently argued against, and which leaves the current wage structure almost entirely intact.

We accept that Coleman’s R4,500 to R6,000 range for a future national minimum wage must be underpinned by further careful research. But the point of departure must be the restructuring of the economy needed to make higher wages sustainable and not the mistaken view that there exists a necessary and mechanical link between higher wages and rising unemployment.

Finally, Seekings and Nattrass accuse us of invoking the ‘magic of the macro-economic argument that paying workers more money would fuel economic growth and job creation’.

But the idea that higher wages can spur domestic demand and growth is hardly a fringe view, with Martin Wolf, chief economic commentator at the Financial Times, arguing that ‘policies designed to promote supply must not simultaneously weaken demand’. This, Wolf notes, ‘is one of the difficulties with the boilerplate recommendation of labour market reform, which entails lowering wages for a large proportion of the labour force and making it easier for employers to hire and fire’ as it is ‘likely to lower consumption at least in the medium term’. Reforms, he concludes, ‘should promote demand’.

Working people having a guaranteed minimum of money in their pockets – through decent wages and wealth redistribution – is essential to eliminating extreme poverty, reducing inequality and improving lives. It is an essential part of the progressive economic and social transformation that this country so desperately needs. This can only come about by increasing investment, on which South Africa lags behind its peers, and thus the relative efficiency of both labour and capital.

Markets don’t create jobs by themselves and low wages don’t naturally generate investment and dynamic advantages. Low wages are not efficient and cheap labour is not itself an engine of growth. The efficiency of investment and strategic management of the economy is a far superior strategy.

Proposing the old cheap labour system as the solution, as Seekings and Nattrass do, is a red herring holding South Africa back from discussing the real policy issues.

Gilad Isaacs is an independent economist. Ben Fine is a professor of economics at SOAS, University of London.

The opinions expressed in this article are solely those of the author(s). No inference should be made on whether these reflect the editorial position of GroundUp.