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  The model does not “assume” how many workers will lose their jobs or how many will gain employment as a result of introducing a national minimum wage. It simulates the impact of a NMW on the economy a...  

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National minimum wage would be good for SA economy – ADRS

ADRS economic model concludes that NMR will reduce poverty, inequality.

Economic modelling and research firm Applied Development Research Solutions (ADRS) has created an economic model that supports the implementation of a national minimum wage (NMW) in South Africa.

ADRS director Asghar Adelzadeh made a presentation about the Dynamically Integrated Micro-Macro Simulation Model (DIMMSIM), concluding that a NMW would not only have positive impact on key macroeconomic and industry indicators, but would significantly reduce the number of people living below the poverty line, as well as inequality.

Adelzadeh had recently presented the findings at a National Economic Development and Labour Council (Nedlac) workshop and reiterated these findings to the National Minimum Wage Research Initiative (NMWRI) at the University of Witwatersrand this week. The impact of a NMW, he argued, was relative to both demand side and supply sides of the economic cycle and it was the net effect that should inform whether it would be a good policy measure for the country.

“It may be true that, if you introduce a NMW, employers may cut jobs, but that’s not the end of the story,” said Adelzadeh. “It can also have a positive impact on growth as household spending power increases. There will be increased demand, which is transferred and multiplied across sectors…government collects more tax and retains more revenue as fewer households are eligible for social grants.”

NMWRI coordinator Gilad Isaacs, said that while it may seem counter-intuitive that a NMW might actually be good for the economy, the international experience proves this to be a flawed instinct.

Isaacs, who recently spoke to Moneyweb on the subject, said there was a misconception, often perpetuated by media that employment is only a function of input costs, particularly where wages are concerned. However, employment is also a function of consumption and investment, which themselves rely upon another myriad of factors.

The DIMMSIM model

Screen Shot 2015-11-26 at 5.38.21 PM

Source: Applied Development Research Solutions

The DIMMSIM contains a macroeconomic and a microeconomic component, and contains more than 3 200 equations and over 400 behavioural equations that explain economic patterns and human behaviour. It includes seven estimated variables for 41 economic sectors, and uses information from a database of detailed demographic, work, income and expenditure information of 30 000 households made up of 62 000 families and about 125 000 individuals.

It also contains equations policy parameters related to government tax, social security and the expanded public works programme. Using all of the above and more, it simulates outcomes based on information that is put into the model, looking at five possible scenarios over the next five years.

Five scenarios

The first scenario (base scenario) assumes the status quo will remain and there is no minimum wage introduced, while the other four simulate the impact of varying degrees of a national minimum wage and compare the outcome. Among other things, the scenario assumes a poverty line of R680 per capita and R930 per adult equivalent per month for 2015, which is increased by 6% annually, and that the average real annual growth rate for the OECD (Organisation for Economic Cooperation and Development) and Sub-Saharan countries will be 1% and 5% respectively

Adelzadeh’s presentation contains a detailed breakdown of each of the scenarios and the respective outcomes of each.

Scenarios

Assumptions

Base

No NMW. Economic performance continues on its current path, where the average real growth rate and the unemployment rate have oscillated around 2% and 24%

Minimal

Sets NMW slightly above the lowest sectoral determinations, without increasing labour costs for the majority of firms, which is about R2 250 per month and annually adjusts for inflation

Maximal

Raises the NMW much higher to cover 65% of full-time employees, setting it at R6 000. Annually adjusted for inflation plus 2%.

Indexed 40%

NMW is indexed to 40% of the 2015 mean wage, or R3 467, and index is annually increased by 1% until it reaches 45%.

Indexed 45%

NMW is indexed to 45% of the 2015 mean wage, or R4 623, and index is annually increased by 1% until it reaches 50%

Source: Applied Development Research Solution

The findings

Adelzadeh said that, apart from a negligible increase in unemployment, the model showed the NMW would improve almost every element of the economy, including economic growth, labour productivity and would stabilise the low inflation rate.

“The overall impact is that it is pro-growth. It raises the annual average growth-rate of the economy,” said Adelzadeh “In the base scenario, over the next five years the primary sectors will decline. But the decline slows down if a NMW is introduced.”

Screen Shot 2015-11-26 at 5.39.37 PM Screen Shot 2015-11-26 at 5.39.45 PM Screen Shot 2015-11-26 at 5.39.53 PM

Source: Applied Development Research Solutions

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I would have liked to see at what minimum wage does the model predicts a negative effect. If we would accept the model as right then it looks from the charts that the higher the minimum wage the higher the GDP growth. (Base 2%, Maximal 2.5%). Extrapolating from this setting the minimum wage at R10000 would increase the growth even further. What about R100000? If the model can not find the point at which the minimum wage is too high and starts to have a negative effect then it is useless.

A model like this is completely dependent on the assumption of how many workers will get laid off due to higher wages.
If you argue only a few will get laid off and the rest will get higher wages, then the demand from higher consumption from the higher paid workers will boost the economy and stimulate further employment.
BUT, if too many get retrenched or replaced by automation/technology (which is often cheaper), then instead you will find mass unemployment and decreased overall demand.
Unfortunately, this key assumption is virtually impossible to predict, but I’m willing to bet this “academic” paper/model is deliberately optimistic in this assumption.

The model does not “assume” how many workers will lose their jobs or how many will gain employment as a result of introducing a national minimum wage. It simulates the impact of a NMW on the economy and household (represented by the model) to produce “projections” of employment and other indicators. For each NMW scenario, what the model takes as given (or as “assumptions”) are the modality of the scenario, such as when will it start, how much will the minimum wage be, whether the minimum wage will change over time, and whether there will be sector exemptions.

This is a flawed assumption.
Here’s why:

You say that an increased minimum wage will cause an increase in growth through consumption.

In SA there are only so many people employed. They have a certain amount of money to spend.
Let’s look at the scenario of domestic servants.
Say that there are 1 million domestic servants in SA for arguments sake.
Let’s say they earn 2000 per month each.
They have 2000 each to spend and their employers have a certain amount of disposable income available to pay them.
Let’s assume that minimum wage rises to 4000 per month.
Some of them will get the increase and they get to spend more.
Now , what about the employers who don’t have the extra 2000 to pay them ?
To offer the employee less than minimum wage effectively makes the employer a criminal , so to keep from breaking the law there are only 2 options :
Let them work fewer hours at the new rate to keep their actual salary the same.
Or retrench them for operational reasons
I can’t see any other options here ?
Now what you have ignored in the article is the fact that if you take an extra 2000 from the employer , you haven’t increased the potential for consumption in the country because you’re just taken from Peter to pay Paul.
Where is the ” increase in consumption ” ?

How is the increase in wages funded.

Expenditure can only follow a increase in income.

How many businesses (small and large) are at the tipping point of closure.

This type of model seems to be implemented at local government where workers earn much more than minimum wages set. The result of this extra spending, no funds to keep local infrastructure intact. This carries on to all other sectors.

The model does not take into account the tipping point where expense is more than income thus leading to a failed entity and more unemployment.

Depending on the scenario for the National Minimum Wage (NMW), the model results for macroeconomic, industry, poverty and distribution indicators do show positive AND negative effects of the scenario relative to the no NMW scenario. It is by showing the effects of the NMW on diverse indicators that ADRS argues that, in the final analysis, the suitability of a meaningful NMW for South Africa depends on whether the negative effects threaten macroeconomic balance and, if not, they should be considered acceptable trade-offs for the policy’s positive contributions.

We must decide if we accept that we are an unproductive country with only 35 % of the population employed , but well paid . Or we are a productive country with 90 % of population employed at market price depending on demand for one’s skills .

The model does not “assume” how many workers will lose their jobs or how many will gain employment as a result of introducing a national minimum wage. It simulates the impact of a NMW on the economy and household (represented by the model) to produce “projections” of employment and other indicators. For each NMW scenario, what the model takes as given (or as “assumptions”) are the modality of the scenario, such as when will it start, how much will the minimum wage be, whether the minimum wage will change over time, and whether there will be sector exemptions.

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