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What should the economy of tomorrow look like?

An argument for moving the national minimum wage closer to a living wage, and other proposals.
Image: Shutterstock

A study conducted by Oxfam indicated that the wealthiest 26 people in the world held as much wealth as the poorest 50% of the world population. Unfortunately, this is not fresh news and rather represents a persistent and increasing gap as evidenced by the Oxfam report.

According to the World Bank, between 1960 and 2017 the distribution of population across income groups saw a significant proportion of the population move into lower income groups relative to 1960.

Table 1: Distribution of Population across Income Groups (1960 – 2017)

Income Group 1960 2017
High Income 25.7% 16.6%
Upper Middle Income 37.9% 34.3%
Lower Middle or Low Income 36.3% 49.1%

Source: World Bank

Table 1 illustrates that since 1960 there has been a significant increase in the proportion of the population that fall within the lower-middle or low-income groups. The article titled ‘Starting over again’ by The Economist, indicates that since the 1940s there have been at least three fundamental shifts in global macroeconomics, with a possible fourth shift on our doorstep given how the present approach to macroeconomics has faltered during the global financial crisis and currently during the Covid-19 pandemic. The question though is what should this next macroeconomic shift be characterised by?

The author argues that at the core of this next phase should be returning to full employment as the impact of the two recent global economic crisis (2008 and present) have been felt the most by the lower income groups. Given South Africa’s unemployment rate of 30.1% (Q1 2020) which is expected to increase to 35.3% according to the IMF, this shift would be particularly welcome within the South African economy.

South Africa’s economy over the last two decades has been characterised by a relatively small tax base, a high ratio of grants paid per personal income taxpayer, high unemployment rates and moderately low economic growth. Clearly this is not a sustainable trajectory for a developing economy and ideally any changes in macroeconomic policy would seek to reverse these trends.

If macroeconomic policy was geared towards aggressively promoting employment it could potentially lower unemployment, reduce the reliance on grants, increase the span of the tax base, raise productivity and hence economic growth.

When it is stated like that it sounds simple, but in reality, there are an infinite number of factors that influence whether such a policy is feasible and whether it will be effective. This article does not presume to have the answers to all these questions but rather seeks to explore the ideal that could unfold if macroeconomic policy that is geared towards increased employment was effectively implemented.

The ideal

The national minimum wage of R20 per hour (subject to stipulated exclusions) was implemented in 2019 and was increased by 3.8% to R20.76 in 2020. Assuming an eight-hour workday and a 22-day work month, this translates into R3 653 per month. The current tax threshold for an employee below the age of 65 is R6 583 per month (R79 000 per annum). This implies that although the minimum wage does afford some protection to the employee against exploitation, this minimum wage does not provide any benefit to the fiscus (in the form of personal income tax) as the minimum wage falls below the tax threshold.

In the build up to the introduction of the national minimum wage the concepts of a minimum wage and a living wage were debated at length. The views expressed within these debates differed significantly based on whom you were asking but one common thread throughout the debate was the recognition that the minimum wage is not synonymous with a living wage.

According to www.tradingeconomics.com the living wage in South Africa is estimated as R6 570 per month. A similar estimate comes from www.living-wage.co.za that estimates this figure as R6 806 per month. Considering that this is almost double the existing minimum wage rate, surely it would be expected that this would result in widespread job losses?

This is not necessarily the case according to an academic paper titled ‘A National Minimum Wage for South Africa’ (Issacs, 2016). The author argued:

“A national minimum wage in South Africa, if set at an appropriate and meaningful level, can achieve its central objectives of reducing working poverty and inequality. As the ILO insists, economic factors must also be considered. This report shows that a national minimum wage can also support economic growth. Minimum wages do not aim to raise employment levels – for that, other policies are needed – but a national minimum wage can be implemented without significant employment effects.”

According to the author, the implementation of a minimum wage would increase the average wage at a faster rate than without a minimum wage, and lower poverty levels. The knock-on effect of this would be increased average household consumption which stimulates the economy. The author goes further and cites examples of where a minimum wage has reduced inequality in the formal and informal sector in Indonesia, Russia, China, India and Europe.

The paper states that “The weight of evidence points to little or no employment response to modest increases in the minimum wage.” If this observation holds within the South African economy then the “sweet spot” which maximises the benefit of balancing the minimum wage and employment should be investigated. If it is possible to increase minimum wages to a level similar to that of a living wage that can contribute to the personal income tax base (the tax threshold would need to be adjusted lower) this would go a long way to widening the tax base, reducing the reliance on social grants and increasing consumption in the country.

This would reduce the pressure on the fiscus and assist South Africa’s macroeconomic stability.

Implementing pro-employment macroeconomic policies, expanding the tax base by moving the national minimum wage closer to a living wage and lowering the tax threshold to expand the tax base sounds like an easy enough task. The reality is that there are many practical considerations that need to be take into account before such a policy can be practically considered.

However, if such a policy is practically feasible, it only seems logical that we should invest time and energy into exploring this option further.

Bryden Morton is an executive director and Chris Blair CEO at 21st Century

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The regular whining about inequality from the likes of Oxfam has been thoroughly and completely debunked, time and again.

It’s very simple: if all of Bill Gates’s billions were to be distributed to all of humanity, each person on the planet would get about US$14. Which would soon be gone anyway.

But then there would also be no incentive to take risks and work extremely hard to create Microsoft Office or iPhones, because why bother sweating in your garage over bits of electronics if you’re going to be just as poor as the guy next door who lies on his couch drinking beer?

Bryden and Chris have clearly never heard of Dr. Thomas Sowell. Thomas Sowell has debunked all these claims many times over as an expert witness to the American enquiries. The minimum wage and social welfare according to Sowell also does not have the intended consequences that government had in mind when they put it into place. The only real way to lift people out of poverty is to educate them so that they would have access to better opportunities. And if government does not like what Sowell has to say about that, they really won’t like his opinion on quotas and/or transformation, and income inequality.

For sure, the future won’t have the energetic vibe of the (19) eighties arts, music scenes, culture etc.

Future could end up ‘zoomingly’ BORING, and with sport stadiums filled with holograms (and large speakers) as the crowd of supporters.

Your work zone will be part of your house, while trying to balance home chores. Loneliness will set in, as corporate ‘identity & employee cohesiveness/team spirit’ will fall apart.

Forget the glorious growl of V6 engines (like your Jaguar F-Type V6, Nissan 370Z or GT-R), of thunderous V8’s (too many too mention), we will be humming along in our EV’s with our expressionless faces.

Can’t wait.

The entire concept of a so-called minimum wage is grotesquely inappropriate in an economy with 50% unemployment. There is only one real minimum wage: it is exactly zero. There is no worse exploitation than getting a salary of zero rand.

At 30% unemployment any move to help the poorest would seem to be best aimed at the unemployed. To criminalise any person offering a job – even a poorly paid one seems counterproductive.

Young people should be encouraged to take up low paid work with the understanding that they are there to learn first. They cannot expect the same wages as their parents on the first job.

For example a teacher could have a low paid assistant or two in the classroom to help her out. If they perform well they should be offered free study fees to become teachers themselves. That way we don’t waste study opportunities on these unsuitable for professions they are studying for. Also our scarce professionals don’t waste their time on menial tasks.

We do need a basic income grant for everyonr which is based on basic set of needs such as food and shelter.

The challenges which we face is preventing politicians and criminals from the corruption thereof.

The wage figure of between R6,500 and R6,800 are close to a Slaves wage of US$427 =R7,150 a month (cost of a slave in the year 1650 brought foward to 2018 + slave ownership for 40 years = $205,000.00)

The current minum wage is set at the actual productivity rate which is 50% of a slaves wage.

With collective bargaining there is no incentive to create real wealth by being more productive but rather, it assumes that all members are working for the greater good thereby enslaving themselves into the socialist system and making everyone equally as mistrable each other except for their slave masters.

No amount of money printing will ever create more wealth, in fact it is wealth destructive because it dilutes the current supply value and there by making everyone more poor.

We will one day return to a Gold Standard.

Excellent comment. Thank You. I agree with every word.

@Sensei
The problem with Socialist is that they think they can defy human nature and that is why their systems cause regression. Their system focus on the principle that we all work with the same knowledge at the same level and for the greater good.

Free Market system is based on human principles, the harder you work the more you will attain within reason of supply and demand for the goods and or services which your are bringing to the market.

The Russian and Chinese are of great examples of these system and their failures.

In 1960 Russia, all people needed to have a job most where employed by the public farms about 40% of citizens however they only supplied 35% of the total farm produce. There were a few citizens which managed to accumulate enough wealth to purchase the maximum of 1 hectare of land from the Goverment, the citizens made up only 3% of the workforce but management to generate 60% of the farm produce. The remaining 5% was imported.

Forcing someone to do something which they do not want to do will not lead to productivity but rather unproductive outcomes.

The living-wage website they post fires off privacy warnings on your browser. The 21st Century website supplies you with supposed ‘business owner’ comments that no business owner would ever ask. The whole ‘vibe’ from both websites feels like one of a well meaning left leaning student with no grounding in reality.

Now on to the wages : My lowest paid employee makes 7k per month, (the man cannot count above 40), I am not exaggerating when I say that he does not offer me value above 3k per month.

His position, like so many others in our society (packers, factory sweepers, tea-ladies, domestics, gardeners) is a form of charity. They will lose their livelihoods – their jobs are not essential – and as usual the poor will suffer.

But it will also make us uncompetitive internationally. Low wages is the one area we can compete in, as low skilled as our labour is.

(P.s. its something that really bothers me, some of my staff (with a matric) can offer nothing and are not willing to learn anything.)

Why would a rational person study, improve himself and acquire the appropriate skills if he can simply use the power of his vote in combination with the colour of his skin to raise the minimum wage?

When you can vote yourself to wealth by expropriating the property of business owners, why work at all? The viability of the minimum wage rests on the fallacy that the business owner will willingly participate in the plundering of his property for the benefit of the voting majority. There is this direct correlation between the level of the minimum wage and the unemployment rate. The higher the minimum wage, the higher the food insecurity.

I do not doubt that the minimum wage is proposed with sincere good intentions, but its effects if implemented recklessly are devastating.

For one trying to increase tax collections through the minimum wage is not going to work: Consider that the employee gets a primary rebate and a lower first rate of 18%, while the company will no longer pay the 28% tax on the increased salary cost.

And this ignores any job losses, of which there will be. Productivity and cost goes hand in hand, at lower wages companies can afford to carry “dead weight” employees that do not actually contribute to productivity. Once wages increase substantially while productivity doesn’t, the “dead weight” employees will be first to go. If wages rises even more, companies might even lay off more workers even if it lowers productivity if the cost saving is so great that overall profitability actually increases.

Working in the agricultural processing industry, I have seen the above calculations in certain plants / businesses. Where reduced production actually leads to increased profits, but still unions are adamant on above inflation increases, increased perks, etc.

South Africa needs to embark on high employment growth policies to bring some sort of balance in the employment supply / demand equation, or the market will bring balance to the equation itself as it has always done by forcing wages lower. And if legislation doesn’t allow wages to be forced lower, the the demand for employees will be decreased. Markets always find a way to balance out, no matter how much governments interfere.

These articles are so prosaic – the address the minimum wage issue without ever addressing the productivity issue. Surely a crowd like Oxfam can work it out that if labour costs escalate without productivity gains then the business will mechanise or cease to operate

South Africa, look at Zimbabwe and view the local economy of the future. The ZANU PF economic playbook is being copied to the letter by the ANC.

What should the econony of tomorrow look like?

Purged of “stimulus” and political interference in economic affairs banned.

So 1960 income inequality has increased.
Since 1960 the welfare state (paying people for doing nothing) kicked into overdrive and political interference also increased until today it is expected.

So ja, for me its stop welfare, ban politicians from the econony and stop printing money.
Actually govts should just plain stop trying to help. In whatever form that takes.

“the wealthiest 26 people in the world held as much wealth as the poorest 50% of the world population”

The bottom 50% should be really ashamed of themselves that they can only generate the same value that a small group of 26 people can.

Be interesting to know how many of that bottom 50% consistently support their “leaders” who of course are in the top 10% at least. SA and Zim are prime examples.

As with most stats the arguments can be as much about the definition as the meaning.

Today we have perverse wealth effects defined by share prices. If Jeff Bizos started tried to sell his Amazon shares they would be worth half or a quarter. So do we rate Bizos and their ilk on a spreadsheet or on realizable value? The top 25 in the world are probably realizable a third of their nominal value. That changes stats and proportions

Currencies also messed with categories. We have a category “High Income”. Somebody with $1m investable assets in Kenya is vastly “wealthier“ than his or her peer in Manhattan or Zurich.

Then you get to “so what”. The Law of Large Numbers. If we redistributed ALL of the spreadsheet value of the top 1000 you would maybe give every man woman child on the planet a minimum wage for 8 months. So a 100% wealth tax on the top 1000 actually makes no discernible difference. I do understand that 8 months of US minimum wage would be life changing to many people, but I don’t think the effect would be as large as socialists imagine. And : when the top 1000 have had their wealth dispossessed – who employs their employees?

I don’t have a solution, but maybe a start would be more equitable tax regimes. Buffett famously said he pays a lower margin of tax than his PA at effective rates. That is not equitable, wealth is a different issue.

The middle class is under immense pressure. Ultimate control is easiest when the middle class disappears. This article smells of Troskyism? And where did that end?

The above mentioned strategy is a real gem. Should also be applied in Zimbabwe. It will solve all its problems – just raise the minimum wage stupid! Wholla!

This article is so filled with nonsense, it is difficult to know where to start.

The biggest cause of inequality in SA is education, or rather the lack of it. Talking about full (or “normal” by world standards, say 10% unemployment) employment in a country without full education is as useful as discussing flying without wings. Twenty-six wasted years when education, instead of narrowing the ability, income, career and wealth gaps, has been dysfunctionalised by a state captured by a teachers’ union.

The writers also fail to overcome the biggest Catch 22: to reduce the advantage of the 20% (or 1%) requires more centralisation and a more powerful state. Centralised and powerful states are notorious for not increasing wealth or inequality. The golden examples are the 2 post-WWII Germanies: the statist “workers’ paradise” had to build a wall to keep its denizens from fleeing to the decadent, exploitive capitalist West. Note that the workers in both “Germanies” began with similar education, wealth (none) and “privilege”, Similarly the two Vietnams and Koreas both proved that market economies work better than “planned”, centralised ones. The toxic bond crash of 2008 is the consequence of the state making well-intentioned interventions in the housing market while Covid-19 could have been stopped had the Strong State in China not put national pride before the truth.

“The economy of the future should” pay less attention to the numerator (wealth) and more to the denominator (people). Half the number of people and wealth per capita doubles. Excess population growth is normally matched by wars (not a favourable outcome), emigration (the white population of north America), famine (also not welcome) or disease … Covid-19? Indeed, it is recognised that the pressure of population growth encroaching on the environment CAUSES plagues like Covid, SARS and, well, plague. Articles like these never highlight that middle- upper-class parents limit the number of children to what they can afford to feed, clothe and educate, and place implicitly or explicitly, the burden of taking care of the large families of the irresponsible (or ignorant) upon others.

While government ministers fantasise about SA entering the fourth industrial revolution, the education which they provide barely prepares its victims (pupils, oops “learners”) for the first.

End of comments.

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