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Looking at the effectiveness of a minimum wage

‘National minimum wages…help in lifting a lot of people, especially the low-paid workers, out of poverty’ – Uma Rani – ILO research department.

SIKI MGABADELI:  The National Minimum Wage Research Initiative at Wits University is hosting a national symposium looking at the research of the body into a national minimum wage, as well as drawing together international and local experts.

We are joined by one of those experts now, Uma Rani, senior economist at the International Labour Organisation’s research department. Uma, thanks for your time this evening. As the ILO, in looking at this national minimum wage, what’s been your experience in its effectiveness, particularly in dealing with poverty and inequality?

UMA RANI:  It’s a pleasure to be talking with you. Actually a minimum wage is a very important market instrument and it is not the only one. It is one among others which we often introduce with a very clear objective of raising the wages of the local people and so improving the wage distribution.

We find that in countries where there are national minimum wages, it does help in lifting a lot of people, especially the low-paid workers, out of poverty and it also helps in reducing inequality.

SIKI MGABADELI:  Are there differences in experiences between developed and developing countries?

UMA RANI:  I think there are quite a few differences between developed and developing countries because in the developed world when you introduce a kind of national wage the impact is on the bottom 5% to 10% of the population, whereas in the developing world you have roughly 20-40% of the workforce which are low paid. So then, when you introduce a national wage, it has a larger impact in the sense of affecting about 30% of the workers and 30% of the households that you lift out of poverty.

But that again depends on at what level the minimum wage is set, who is covered, how simplistic or complex minimum wage setting is.

And lastly, the most important thing is how good compliance is. In the developed world you have very high rates of compliance – close to 100% – whereas in developing countries this is not so. It varies roughly between 50% and 80%. So that plays a huge role in ensuring that the workers who are getting minimum wages can get out of poverty or not.

SIKI MGABADELI:  And finally, Uma, there is the difficulty of determining that level of the minimum wage. We in South Africa are rated as a middle-income country. How do you determine what we can afford?

UMA RANI:  There are very clear criteria that go into defining the level of minimum wage. One has to take into consideration the basic criterion, which is the needs of the workers and families.

And the other one is the productivity criterion, where you take into consideration what the employment situation is and how the overall economic environment is. And once you take that into consideration, you look at the mean wages and median wages and come up with a decision as to where you set it. That’s a very difficult, complex process. And what we normally advise countries is that this should be coordinated very well with the business partners and the government and the unions in deciding, to actually deliberate and come to a level of minimum wage.

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Mark Swanepoel

Mark Swanepoel

Axiomatic Consultants
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