The Economics of Minimum Wages in South Africa and Brazil

The Economics of Minimum Wages in South Africa and Brazil Nicoli Nattrass Centre for Social Science Research University of Cape Town April 2015

The Nissan factory in Japan makes far greater use of robotics than the Nissan factory in India, where wages are much lower. Wage costs matter in determining which technologies get selected and implemented

Wage W 2 W 1 E 2 E 1 Demand Employment

Higher-wage SA clothing factories tend to be capital-intensive, and produce for niche markets (sports goods, school blazers, expensive kiddies clothes). Lower wage firms producing simple massmarket items (e.g. sleep wear, t-shirts) tend to be more labourintensive. Labour productivity is lower and they have more jobs

Wage W 2 W 1 E 2 E 1 Demand Employment

Wages and productivity are higher in capital-intensive firms. But should we only have such jobs in a country with such high unemployment?

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Unemployment rate (%) 30 25 South Africa 20 High income 15 10 5 Upper middle income Lower middle income Low income 0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Employment to working age population (%) 70 65 Low-income (average 32 countries) 60 55 50 High-income (average 58 countries) 45 40 Middle-income countries (average 84 countries) 35 30 South Africa

10 20 30 0 Macedonia Bosnia and Herzegovina Lesotho South Africa West Bank and Gaza Swaziland Guyana Montenegro Serbia Armenia Yemen, Rep. Botswana Namibia Iraq Sudan Albania Georgia Jamaica Iran Tunisia Jordan Egypt, Bulgaria Suriname Zambia Arab Rep. Hungary Turkmenistan Uzbekistan Maldives Colombia Algeria Belarus Senegal Lebanon Turkey Morocco Libya Syrian Arab Republic Mauritius Costa Belize Kyrgyz Republic Nigeria UkraineNicaragua Venezuela, Rica Cabo Verde RB Romania El Salvador Philippines Indonesia Brazil Congo, Rep. Paraguay Moldova Pakistan Mexico Mongolia Azerbaijan Sri Lanka Honduras Kazakhstan Panama Solomon Cote Ecuador d'ivoire China Islands Timor-Leste India Ghana CameroonPeru Malaysia Bolivia Cuba Papua New Vietnam Guinea Lao PDR Thailand 30 40 50 60 70 80 Employment to population aged 15+ (%) 2012

Rand per week (2003 prices) Minimum wages in the SA Clothing Industry Minimum wage for trainee machinist 450 400 350 300 250 Cape Town Durban Newcastle 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 The bargaining council (since 2003) has rapidly increased minimum wages in non-metro areas

This, plus competition from China, has caused massive job losses in the industry

Job destruction in the clothing sector 160000 Employment in the Clothing Sector 140000 120000 Clothing 100000 80000 60000 40000 20000 0 Source: Johann Baard (AMSA)

Output per worker x x x x x x x Wages

Output per worker x x x Higher x wage, x higher labour x productivity x x x firms: x producing x for x niche markets; x x subsidised by DTI; x mostly metro Lower wage, x lower labour x productivity x x x firms: producing x for x x x x mass markets, x x x competing with x imports; x mostly x nonmetro Wages

Output per worker Minimum wage set in the Bargaining Council x x x Higher x wage, x higher labour x productivity x x x firms: x producing x for x niche markets; x x subsidised by DTI; x mostly metro Lower wage, x lower labour x productivity x x x firms: producing x for x x x x mass markets, x x x competing with x imports; x mostly x nonmetro R2,638 Wages

10 20 30 0 Macedonia Bosnia and Herzegovina South Africa West Bank and Gaza Montenegro Serbia Yemen, Rep. Lesotho Swaziland Guyana Armenia Namibia Is the Brazilian option of wage led growth possible for South Africa today? Botswana Iraq Sudan Albania Georgia Jamaica Iran Tunisia Jordan Bulgaria Suriname Zambia Egypt, Arab Rep. Hungary Turkmenistan Uzbekistan Maldives Colombia Algeria Belarus Senegal Brazil Lebanon Turkey Morocco Libya Syrian Arab Republic Costa Belize Kyrgyz Republic Nigeria Mauritius UkraineNicaragua Venezuela, Rica Cabo Verde RB Romania El Salvador Philippines Indonesia Brazil Congo, Rep. Paraguay Moldova Pakistan Mexico Mongolia Azerbaijan Sri Lanka Honduras Kazakhstan Panama Solomon Cote Ecuador d'ivoire China Islands Timor-Leste India Ghana CameroonPeru Malaysia Bolivia Cuba Papua New Vietnam Guinea Lao PDR Thailand 30 40 50 60 70 80 Employment to population aged 15+ (%) 2012

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 70% 60% 50% 40% 30% 20% 10% 0% 62,0% 65,6% 40,0% 39,2% 27,1% 24,9% 9,7% 5,9% Brazil employment rate South Africa employment rate South Africa unemployment rate Brazil unemployment rate Brazil has lower unemployment rates and when the national minimum wage and social grants were increased during Lula s second term of office in the mid-2000s, the labour market was already tight.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 10% 8% 6% 4% 2% Brazil household consumption growth Brazil GDP growth 0% -2% -4% -6% Brazil current account balance (% of GDP) The increase in minimum wages and social grants helped boost growth and cushion the poor from the effects of the global economic crisis. But persistent balance of payments problems are posing limits on the potential for further consumption-led growth

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 10% 8% 6% 4% South Africa household consumption growth 2% 0% South Africa GDP growth -2% -4% -6% South Africa current account balance (% of GDP) -8% -10% South Africa has the same share of consumption in GDP (about 61%) but it has a current account deficit of twice the size).

GDP per capita in purchasing power parity (PPP) international dollars (2013) Brazil South Africa $15,038 $12,506 Minimum wage in PPP international dollars* (2014) $404.47 $304.6 (PWP) What the minimum wage would need to be in South Africa R2,091 to be equal to the minimum wage in Brazil (in terms of PPP) Minimum wage for domestic work (2014) R2,065 (urban) and R1,813 (rural) Average minimum wage set by the Employment Conditions R2,362 Commission in sectoral determinations (2014) Average minimum wage set in bargaining councils (2014) R2,732

GDP per capita in purchasing power parity (PPP) international dollars (2013) Brazil South Africa $15,038 $12,506 Minimum wage in PPP international dollars* (2014) $404.47 $304.6 (PWP) What the minimum wage would need to be in South Africa R2,091 to be equal to the minimum wage in Brazil (in terms of PPP) Minimum wage for domestic work R2,065 (urban) and R1,813 (rural) Average minimum wage set by the Employment Conditions R2,362 Commission in sectoral determinations (2014) Farm R2,420 Average minimum wage set in bargaining councils (2014) R2,732 Minimum wage in the clothing industry for non-metro areas R2,638 like Newcastle, wage for qualified machinists (2014) Minimum wage in the clothing industry for qualified R3,834 machinists in Cape Town (2014)

Conclusion South African minimum wages are already at Brazilian levels (and Brazil has a lower unemployment rate and higher per capita income) There is currently no space in the Brazilian or South African economy for wage-led growth Wouldn t we be better off addressing poverty and inequality by taxing higher income earners and expanding the welfare net, perhaps through a Basic Income Grant, and/or by expanding the public works program? And we should certainly stop destroying jobs. More consideration should be given to potential job losses before the Minister of Labour extends bargaining council minimum wages to non-parties