Recent research by Wits University’s National Minimum Wage Research Initiative (NMWRI) argues that workers receiving relatively more income from the implementation of a national minimum wage could boost domestic output and spending.
Several analysts, including Terry Bell in Fin24, and economist Dawie Roodt on Business Day TV, disagree.
Bell and Roodt argue, without providing evidence, that the potential increase in spending resulting from a national minimum wage would merely suck in imports, with the domestic economy not benefiting.
For Bell this highlights the major flaw in the Wits research: that a national minimum wage is being advanced “in isolation”, presumably from the other policies needed to ensure that the domestic economy benefits from more local consumer spending.
South Africa does need to undertake measures to enhance local production, but these are best advanced alongside a national minimum wage. Supportive measures are needed on both the demand and supply sides to expand the domestic economy and its productive capabilities. Such measures do not need to involve curbing domestic consumer demand.
To the extent that Bell and Roodt’s arguments describe reality, it logically applies to all consumer spending. Would they then also propose social grants being held constant or even eliminated, or wages lowered further, in order to suppress imports relative to locally produced products?
Bell and Roodt would do well to first study the Wits research report before dismissing it, especially as it does provide insight into these issues. The report is based on a series of academic research papers conducted over the past 16 months, including two statistical modelling exercises, both of which take into account South Africa’s integration into global markets.
One of the statistical modelling exercises, of which I am an author, uses the United Nation’s Global Policy Model (GPM), a macroeconomic forecasting model used by the G-20 and others.
In the study we analysed how moderately raising the share of national income in South Africa going to wage earners (the ‘labour share’) impacts domestic growth. A rebalancing in the labour share towards workers could arise for a number of reasons, including raising minimum wages.
South Africa’s labour share is around 5 percentage points lower than its peers and has declined in the post-apartheid era. There is a growing consensus among global policy makers that the world economy is suffering from too little demand. This is partly due to rampant inequality: most households do not have enough money to buy the goods and services that allow the economy to tick over.
In particular, four key findings from the GPM modelling exercise are relevant to answering Bell and Roodt’s conjectures:
Firstly, the South African economy benefits overall from a relative rebalancing of the economy towards wages: consumption, gross investment, and GDP all increase above the ‘baseline’ of the economy when the labour share increases in the GPM.
Secondly, increasing the labour share is not a magic bullet: its effects are not large in the GPM, and it has no major impact on employment.
Thirdly, South Africa’s trade balance (the value of exports relative to imports) deteriorates further (a growing deficit) from the expansion in domestic demand.
Fourthly, increasing South Africa’s labour share is far more effective when it is not done in isolation from other supportive policy measures, locally and internationally.
When complementary domestic policies, such as increased public infrastructural spending, are used in conjunction with increasing the labour share, the effects are larger in the GPM. And when other countries implement similar policies alongside South Africa to increase their labour shares, South Africa, as a small, open economy, benefits further.
Importantly, the GPM finds that even under these ‘complementary’ scenarios, South Africa’s trade balance deteriorates. This reflects a long-standing weakness of the country’s mineral-dependent economy to competitively produce a diverse range of goods and services. (The deterioration in the trade balance is, however, not severe. Strong productivity effects and reductions in the ‘mark-up’ by firms on their prices – which determine their profit rates – help to sustain exports.)
Export competitiveness, and in turn South Africa’s trade deficit, is a problem of poor productive capabilities, also known as the ‘supply-side’ of the economy. It is therefore to the ‘supply-side’ that we need to look in order to try and help firms in South Africa benefit more fully from increases in domestic and foreign demand. Suppressing domestic demand is not the solution to South Africa’s long-standing, structural, supply-side weakness.
The primary benefits of a national minimum wage for South Africa are, however, through its notable impacts on reducing poverty and inequality. A second modelling exercise undertaken by Wits forecasts that a minimum wage, set at meaningful levels, would reduce both inequality and poverty in South Africa, in line with experiences globally.
Given these encouraging findings, a national minimum wage is a potentially important plank in any suite of measures that aims to expand the South African economy in a balanced and sustainable manner. Positive measures are needed on both the supply and demand sides to boost the domestic economy.
Suppressing domestic demand is not necessary to stimulate local production in South Africa, and, if anything, is likely to have the opposite effect.
This article was first published on Fin24.com.
Ilan Strauss is a PhD student in Economics at The New School. He works as an economics consultant.
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Developing Economics 