South African President Cyril Ramaphosa on Monday signed the National Minimum Wage Bill into law, in a historic move aimed at protecting low-earning workers. The law includes a plan to reduce inequality in society and decrease huge disparities in income in the national labour market. The Act sets a minimum of R20 per hour for the majority of the country’s workers. This is expected to raise the earnings of an estimated six million South Africans, who currently earn below R3,500 per month (R20 per hour). But in addressing inequality, raising wages is not an end in itself, rather a means to an end.
South Africa has the worst level of inequality in the world, according to the World Bank, with Gini coefficient of 0.63. It is one of the challenges President Cyril Ramaphosa is trying to address in the country which also has a high unemployment rate measured as 27.2 percent in the second quarter of 2018. Poverty is high in Africa’s most developed economy, with more than half of the country’s population living below the poverty line.
Deliberations on the protection of low-paid workers, fair and effective competition in the labour market, the challenges of labour instability and wage inequality began more than four years ago. It is widely seen as a way to address inequality in the country, more than two decades after South Africa ousted a racist apartheid system that kept majority of the citizens in poverty, while most of the nation’s wealth sat in the hands of a small elite. According to a recent report from the World Bank, the top 1 percent of South Africans own 70.9 percent of the nation’s wealth. The bottom 60 percent of South Africans collectively control only 7 percent of the country’s assets.
President Ramaphosa stressed that the National Minimum Wage will not end income inequality but provides a firm foundation from which to advance the struggle for a living wage. Although, several research works conclude that “increasing the minimum wage reduces inequality – by decreasing the earnings gap between the median and the bottom decile”, a high minimum wage does not necessarily address inequality. This was also the argument of Chew Soon Beng, a Singaporean economist who wrote a commentary published on Channel News Asia. Soon Beng was reacting to Oxfam’s index that measures commitment to inequality, which ranked Singapore low, mainly because the country lacks a minimum wage.
“Oxfam implies that having a minimum wage will improve national outcomes in terms of achieving greater equality – whether through a lower poverty rate or higher social mobility. Is that really so?” Soon Beng wrote.
To put Soon Beng’s question into context, we checked whether countries with high minimum wage have lower inequality, as Oxfam suggests. We found this not to be so in many countries in Africa. Namibia pays the highest minimum wage in Africa at $1,218 per month but it is also the second most unequal country in the world. Following Namibia closely in terms of minimum wage is Benin. The West African country pays a minimum wage of $1,202 per month but it also high up in World’s top 20 most unequal countries. Same goes for Seychelles which pays $440 per month but has the same Gini coefficient with Cameroon which pays a minimum wage of $63 per month. Minimum wage can simply not address inequality, not in a capitalist world.
Like French economist Thomas Piketty noted in his 2014 book Capital in the Twenty-First Century, inequality is the inevitable outcome of capitalism. Central to his thesis is that the returns on capital always exceed economic growth. As a result, the owners of capital always grow faster than the earnings of labour. With enough earnings to save from, the rich grow their stock of capital as fast as
the economy, if not faster. This is how inequality widens.
Piketty’s remedy is a higher marginal income tax rates for the wealthy and for a global wealth tax, stressing that without taxing wealth, inequality cannot be reduced because of the ability of the wealthy to hide their true income.
Victor Sulla, a senior economist for the World Bank in charge of southern Africa tend to agree with Picketty, as he noted that “opportunity inequality” has made it difficult to make remarkable progress against poverty. “Some people have more access to opportunity than others. And the people who’ve traditionally had wealth and economic opportunities continue to enjoy those benefits,” he told NPR.
To reduce inequality, South Africa also has to enforce a living wage, which, of course, is on the horizon, as President Ramaphosa has shown. With a living wage, workers will be able to afford a basic but decent standard of living. The country also needs to plug all leakages, including tax avoidance and illicit financial outflows.
Good thing President Ramaphosa is not under the illusion that increasing the national minimum wage alone would help South Africa address inequality. Speaking to world leaders at the United Nations General Assembly in September, Ramaphosa stated that effective investment in education, improved health care, good governance and greater economic integration will help Africa “develop its productive capacity on a scale and at a rate that will lift tens of millions out of poverty”. For his country, Ramaphosa is focusing on the areas of economic activity that will have the greatest impact on youth, women and small businesses, following years of slowing pace of growth, high inequality and unemployment.
Also, South Africa has invested heavily in social programs, which Sulla says are not doing badly.
“Their social protection programs in terms of different grants and support for the poor are working very well,” he says. “This country is one of the best in the world in terms of the efficiency of its social protection system.”