Conundrum of national minimum wage and unemployment

The conundrum of the national minimum wage and its influence on unemployment is not an easy one to solve. While the minimum wage makes it more difficult for small and medium companies to employ more people, people earning the minimum wage already live below the poverty line.

South Africa’s official unemployment rate has decreased by 0.3 of a percentage point compared to the previous quarter, with the latest number now at 32.6%.

However, these gains did not come without losses, as approximately 200 000 jobs were lost in some of the country’s major industries.

2024 Minimum wage discussions in motion

Now the yearly discussion around increasing the minimum wage has intensified as the National Minimum Wage Commission calls for public submissions on the increases for 2024.

Employers are already under pressure to hike their wage bills as inflation pushes workers beyond the minimum wage bracket to negotiate for better pay to match the rising cost of living.

The Pietermaritzburg Economic Justice and Dignity Group calls the minimum wage a poverty wage because it hurts workers, reduces productivity in the workplace and slows down economic growth.

When the current minimum wage of R4 270,56 is divided into equal portions for a family of four people, every individual gets R1067,64, far below the upper-bound poverty line of R1 417 per person per month.

Millions locked into poverty

Set at such a low level, the minimum wage institutionalises the low-baseline wage regime and locks millions of workers into poverty.

Small annual increments of such a low base and which do not reflect inflation levels as experienced by workers (including not projecting inflation forward for workers in the entire 2023/24 term), means that workers on the minimum wage get poorer and poorer each year, the group says.

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The minimum shortfall on food for a family was 47.5% in July. After paying for transport and electricity, workers are left with R1 851,64. If all of this money went to food, it would provide R462,91 per person per month for food. The Food Poverty Line is R663.

It is clear that the minimum wage does not make any difference to how poor people are forced to live. The minimum wage is never increased to accommodate the cost of living.

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Is growing the employment rate more important?

“As the possibility of raising the minimum wage to match the rising cost of living looms, South Africa must prioritise the objective of growing its employment rate or risk further economic vulnerability,” says Onyi Nwaneri, CEO of Afrika Tikkun Services, a youth development agency specialising in corporate transformation by connecting skilled black youths to the workplace.

“While we applaud the labour regulations seeking to protect worker’s rights, we call for a policy framework that ends the cycle of unproductive, unskilled labour and unemployment in the country. Unproductive workforces destroy the ability of companies to create wealth and therefore more jobs.”

Studies show that while the blanket minimum wage was historically a net positive in developed countries, it could have unintended consequences in countries with high youth unemployment rates like South Africa.

Link between minimum wage and unemployment rate

Nwaneri says it is essential to consider all perspectives when discussing policy changes that affect the economy.

Industries that contributed the most to employment are construction, that added 104 000 jobs, trade that added 92 000 jobs and community and social services that added 63 000 jobs.

At the same time, employment losses were recorded in manufacturing, where 96 000 jobs were lost, finance, where 68 000 were lost, transport where 7 000 jobs were lost and utilities where 6 000 jobs were lost.

Nwaneri says it is time to investigate the link between minimum wage and unemployment rates in South Africa, as increasing the minimum wage can contribute to higher labour costs which can have a significant impact on small to medium businesses.

The current minimum wage increased by about 9.6% from R23,19 per hour in 2022 to R25,42 per hour in 2023.

Precarious balancing act

Nwaneri says finding a balance between fair wages and employment opportunities is complex.

“Increasing the minimum wage should be a balancing act that takes into account the need to reduce poverty and inequality considering high inflation rates, but still prevent a situation where small businesses, which are the backbone of the economy, can no longer afford labour costs.”

She warns that it will remain a pipe dream to solve the triple problem of poverty, inequality and unemployment if we do not find a balance between addressing economic challenges and the social impact of inflation.

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Will the minimum wage work with other policies?

“Like Thomas Edison said, ‘Insanity is doing the same thing over and over again expecting a different result’. It is time we looked at things holistically and differently to find a new and balanced approach.”

It is important to consider implementing minimum wage policies alongside other measures to support businesses to address valid concerns about minimum wage increases discouraging small businesses and impeding job creation, she suggests.

“One of the most effective measures which can largely be credited for the survival of the economy during the Covid-19 pandemic, was providing tax incentives or access to affordable loans and training programmes.

“These measures could help alleviate the burden on smaller enterprises while still ensuring fair wages for workers.”

‘We do not want labour to be unaffordable’

Nwaneri says the minimum wage must not be increased so much that it risks exacerbating unemployment.

“South Africa has the highest youth unemployment rate in the world and significant wage increases will discourage employers and in particular SMEs, to create employment. We do not want labour to be unaffordable for those who need it most and who are in the best position to create it.”

The decision to raise the minimum wage and by how much should also be informed by what we know about the long-term impact of similar policies around the world, she says.   

“It is also important to note the lack of research on the impact of South Africa’s wage policies on unemployment rates and economic growth against the backdrop of long-existing challenges in those areas.

“Therefore, policymakers should take a comprehensive approach that includes supporting job creation, entrepreneurship and other labour market policies to address high youth unemployment rates effectively,” Nwaneri concludes.