The political economy of a national minimum wage

In late 2014 the Deputy President and the social partners in the Ekhuruleni Declaration agreed to complete the negotiations on the National Minimum Wage (NMW) and Wage Inequality by July 2015. We knew that this was a tall order, but I don’t think we fully appreciated the degree of resistance which this important but apparently modest reform would generate.

Now, over two years later, with the announcement by the Deputy President on 8 February 2017, as the outlines of a deal on the NMW and related issues has taken shape, it has become far clearer as to why there has been and continues to be such a struggle over this important policy intervention. And why in an important sense it strikes at the heart of our political economy.

Wherever the NMW has been introduced in the world, it has elicited resistance. But after initial hysteria and dire predictions, many in business have come to welcome its unanticipated impact in removing unfair competition through cheap wages, raising productivity, and its stimulus effect on the economy. It has indeed become a very popular policy: in the UK for example, it is now rated as the most popular policy intervention in recent decades, and the Conservative Party government is intervening to ramp up the NMW, because they regard their Low Pay Commission as having been too timid in raising it.

But South Africa is different from many other countries in two critical respects. First, our economy continues to be characterised by the apartheid legacy of cheap black labour, which is based on the historical dispossession and oppression of the majority. Anyone who doubts that this legacy is alive and well only needs to look at the latest earnings data from Stats SA which show that black workers continue to earn a fraction of that earned by the rest of the population. Profits, and often super-profits, still rely on this inexhaustible supply of cheap black labour.

Second, and this is a related point, because of the depth of this cheap labour system, an NMW set at any reasonable level will impact on a very large number of workers. Even the relatively low level which is proposed will impact close to 50% of the workforce. (As we point out below the real number of affected workers will be less than this, for various reasons, but it may be the NMW which has affected the greatest proportion of working people, than any comparable country.) This compares to many other countries where the NMW impacts a far smaller number of low income earners. Thus changing the apartheid wage structure would certainly be an example of radical economic transformation, as opposed to elite enrichment.

So a proposed NMW which threatens to change this wage structure, together with other interventions to tackle wage inequality, will inevitably generate powerful enemies. And this has certainly been the case with business negotiators (as well as some government technocrats), using every trick in the book to either obstruct the introduction of an NMW, or attempting to water it down to such an extent that it has no impact on low-paid workers.

Whatever our reservations and concerns about the current package on the table, the establishment of a meaningful NMW, if it impacts on the lowest paid workers in the short term, and holds out the prospect of a medium-term transformation of the wage structure, is a significant advance in the fight against working poverty and inequality. We look at the key features of the deal and attempt to assess whether it moves us in this direction.

What is the nature of the NMW deal announced by the Deputy President?

A few important points need to be clarified if we are to understand the nature of the proposed NMW Deal (‘the Deal’), and some issues which continue to either need clarification, be contested, or referred to processes which still need to unfold:

1. The Deal is a high level broad agreement which attempts to capture certain principles, and focuses only on certain critical issues, in order to assist an announcement in time for the SONA on February 9. The most high-profile and critical of these issues which had been agreed was the setting of the level of the NMW at R20 p/h, or R3,500 for a 40-hour week and R3,900 for a 45-hour week. But some issues directly related to the level, such as protections for minimum hours, remain unsettled.

2. A number of important issues, some of them requiring substantive negotiation, are referred to processes which will continue to be dealt with by the Nedlac Committee of Principals, chaired by the Deputy President, in the coming weeks and months. In fact, there are eight issues which have been deferred in this way, including core agreements around measures to combat wage inequality; enforcement; working hours; and institutional arrangement – we outline these further below. Therefore the deal is neither exhaustive nor conclusive.

3. Some issues contained in the deal remain contested or have been captured in an ambiguous or confusing manner. The process of seeking clarity on these issues, and resolving them, would have unfolded regardless of whether Cosatu had withheld its signature or not. Examples of such issues are interpretation of agreements on annual adjustments to the NMW, the setting of medium-term targets for the NMW, and interpretation of the purpose of establishing minimum hours.

Is the deal a significant advance for workers?

This can only be fully answered once some of the outstanding issues have been settled. In the end, in any complex negotiations, there has to be consideration of the package, and whether, taken together, its main elements constitute an advance. But it is possible to identify some important, if modest gains for workers.

Improvements on previous positions by business as well as the proposals emanating from the NMW Expert Panel include:

• the R20 p/h or or R3,500 for 40 hours and R3,900 for 45 hours is an improvement on the around R2,000 per month or R11.50 p/h which business had proposed until the end of 2016;
• the panel of experts proposed to suspend enforcement and increases for several years, and to give differential treatment to small business. This has not been agreed. Enforcement of the NMW throughout the country, and in all sectors, starts in May 2018, and there is an agreement on regular annual increases which at least preserve the value of the NMW;
• the commission will put a medium target in place to progressively improve the level of the NMW;
• it is agreed to phase farm workers and domestic workers into 100% of the NMW which will significantly improve their incomes;
• it is agreed that all SDs and collective agreements below the NMW level will be brought up to that level from May 2018, and there will be no downward variation of more favourable conditions of workers covered by collective agreements, SDs or private contracts.

1. Level of the National Minimum Wage

The level of the national minimum wage will be R20/hour, or R3,464 a month for 40 hours per week, and R3,897 a month for 45 hours a week. (Some commentators have used an incorrect method to calculate the NMW, by assuming that you multiply the hourly wage x 40 (or 45), to get the weekly wage, and then x 4, forgetting that there are more than 4 weeks in a month. The official formula is to multiply the weekly wage x 4.33)

Many in social media, and commentators in general, have been outraged by how low this amount is. They have correctly pointed out that a worker earning R3,500 p/m cannot afford to provide the most basic necessities for their family. This is borne out by studies by Saldru at UCT which show that the Minimum Living Level would have been R5,544 for a household of four in Feb 2016 prices, and therefore substantially more in 2018.

But this justifiable anger at how low the introductory level of the NMW will be needs to be tempered by three important realities:

• First, until December last year business negotiators were proposing a NMW of around R2,000 p/m or about R11.50 per hour, in response to our demand for a NMW of R4,500p/m or R26p/h. Agreement on the R20 p/h is therefore a significant advance in relation to business (and governments) positions, while falling short of labour’s demand.
• Second, even at this low level, millions of low-paid workers will have their wages improved. Some significantly, some marginally. Statements based on estimates of the NMW Panel of experts, that over 6-million workers will benefit are probably significantly overstated for the following reasons – implementation of the NMW in May 2018 rather than July 2017, as initially proposed by the panel, will erode the NMW’s value; there is probably a significant underestimation in the statistics of the level of wages; and a number of informal sector workers are unlikely to immediately benefit. Nevertheless over 4-million workers will still benefit when the NMW is introduced at R20 p/h in 2018 – see below;
• Third, there will be massive pressure for the NMW level to be progressively and significantly improved in coming years. Agreement on the setting of a medium-term target is a step in this direction. So the question which needs to be considered is whether the NMW level improves on current ultra-low wages, and lays the basis for progressive improvements in the medium term.

The Wits National Minimum Wage Research Initiative (NMW RI) estimates that when calculated in 2018 prices nearly 4.3-million low-wage workers will have their wages raised when the NMW comes into effect – ultra-low wage levels will increase to R20 p/h for formal sector workers; R18p/h for farmworkers at 90% of the NMW, and R15p/h for domestic workers at 75% of the NMW. These are the numbers that will benefit:

• Formal sector workers under R20 p/h in 2018: 3,048,780
• Farm workers* under R18 p/h: 509,482
• Domestic workers* under R15p/h: 728,680

TOTALL 4,286,942

* For farm and domestic workers, these figures include informal sector

The extent of low-paid work is reflected in this infographic produced for the negotiations by the Wits NMW RI, which estimates the number of formal sector workers in some key sectors earning less than R20 p/h in October 2016:

Detailed quantification of how many workers’ wages will improve in different sectors, and by how much, still needs to be done, but the Wits NMW RI analysis of sectoral determinations (SDs) shows that at current rates of increase of SD wages, five of the eight SDs’ minima would be significantly below the R20 p/h NMW by June 2018, and therefore all workers covered by those SDs would benefit. And the remaining 3 SDs (security, cleaning, and wholesale and retail) would have six grades above the NMW and six below. So there is little doubt that the majority of low-paid workers will benefit from the NMW.

Despite being tiered at 75% and 90% respectively, both domestic and farmworkers will be better off when the NMW kicks in: The NMW RI calculates at current rates of increase of SD wages in these sectors, they would not even reach these tiered levels by June 2019 – domestic workers (non metro) would reach R13.79 in 2019 vs. the R15 tier agreed to for May 2018; and farmworkers would reach R17.54 in 2019 vs the tiered level of R18 which will cover farmworkers in May 2018. Their inclusion as a tier of the NMW with a commitment to increasing their wages to 100% will be a major advance for these most exploited workers.

Data on the average wages of the bottom 50% of formal sector workers shows that in 11 of the 13 sectors, average wages of the bottom 50% are way below R3,500. This graphic gives a sense of the depth of the problem of low-wage work.

Further, a significant number of workers covered by collective agreements will see their wages improve, in sectors such as clothing. Nevertheless, for most sectors and businesses it is not a massive leap to make, particularly given the current inequities in the wage structure, which allow for its substantial reconfiguration.

2. Increases in the NMW and the medium-term target

If the NMW stagnates at R20, or even worse, loses some of its value, then the critics of the NMW who argue that it is unacceptably low will have been vindicated. Labour’s approach from the beginning of the negotiations has been that if we start from a relatively low level, when compared to the basic subsistence needs of workers, then the NMW package must be designed in such a way as to ensure a transformation of the wage structure: progressively increasing the value of the NMW over the medium term; and deliberately reducing the excessive levels of wage inequality in S Africa, in a way which redistributes the surplus and flattens the wage structure. This philosophical approach has been supported by the Deputy President on a number of occasions.

The agreement that the NMW Commission, which will oversee implementation of the NMW, must establish a medium-term target for the NMW, based on agreed benchmarks, is an important step in that direction. While our preference had been for this target to be set upfront through the negotiations, this commitment makes it clear that there must be a progressive improvement in the NMW to meet a target over the medium term. The deal only refers to “appropriate benchmarks”, without stipulating them, which may create some uncertainty. The benchmarks which have been discussed in the negotiations are: the minimum living level; internationally typical ratios of the NMW: average wage; and the average minimum in collective agreements.

Further, the commitment to annual increases in the NMW, which must at least protect the NMW against erosion of its value, lays the basis for the commission to set out a road map for achievement of the medium-term target, within stipulated time frames. There are however some problems with the formulation on increases in the draft deal, which we outline below. Our proposal for a schedule of upfront increases in the first few years (inflation + x%) which is the approach taken with SDs, was rejected by business, and government argued that the commission in any event is likely to adopt that approach, as has been the case with the ECC. Time will tell.

3. Relationship of the NMW to sectoral determinations and collective agreements

It is agreed that all Sectoral Determinations and Bargaining Council Agreements must align with the NMW Act at the time of implementation ie their minima must be no lower than the NMW floor. Further, that no employer may unilaterally decrease wages or conditions of workers prescribed by Sectoral Determinations or Bargaining Council Agreements, or private contracts, which are more favourable than the NMW, and that this will be in breach of the law and an unfair labour practice.

This is important because it ensures that the NMW is designed to support collective bargaining, and promotes the NMW as a springboard for improved conditions, rather than as a “maximum wage”, where employers collude to drive wages down to this level, as they did in the mining industry historically. The international experience suggests that rising NMWs and collective bargaining tend to be mutually reinforcing.

4. Exemptions and exclusions

Apart from the tiering arrangement for farm and domestic workers, no significant sectors or categories of workers are excluded, with the exception of EPWP workers – see below. Proposals to exclude small businesses have been rejected, based on cogent arguments from the NMW panel on the South Africa reality, as well as consideration of the international experience. A tight, limited process of exemptions is agreed which individual businesses can apply for, on the basis of inter alia – opening their books; consultation with affected workers; exemptions being limited to one year, and exempted businesses are required to pay a specified portion of the NMW.

An agreement reached in Nedlac stipulated that sectors can only be considered for exclusion or phase-ins if this is agreed upfront in the legislation. Up to this point only the two sectors are included in the agreement, at the level of tiers.

5. Enforcement

Enforcement of the NMW throughout the country will start in May 2018, despite attempts to defer enforcement of penalties for a couple of years. While this is progress in principle, a concrete enforcement strategy is needed, which has effective penalties, enforced by a well resourced and capacitated inspectorate, as well as use of state levers such as procurement and incentives, requiring compliance certificates. Labour has tabled an enforcement strategy, which addresses these elements. Discussion on enforcement is one of the matters which has been deferred to the COP.

There needs to be a major awareness campaign by the labour movement, government, and other players, in popularising the NMW. International experience suggests that it is far simpler to make people aware of their rights and to enforce an NMW because of its simplicity. This will certainly be true in South Africa, where there are currently hundreds of minimum wage levels.

What are our main concerns?

The NMW agreement is a high-level accord, attempting to reach agreement on certain basic principles, cobbled together just in time for the President’s SONA on February 9. As such it is not conclusive on a number of issues, is ambiguous on others, and puts quite a few issues into further processes. This leads to the concern that unless we ensure a clear resolution of issues, we may be deferring conflict to the legislative drafting process, and even until after the NMW is implemented. It also becomes difficult to assess the total NMW package, since critical issues await resolution.

1. Ambiguities in the agreement

A key area of ambiguity which could cause major problems is on the issue of annual increases. The draft deal provides that while annual increases in the NMW should “not lead to the erosion of the value of the NMW”, the actual increase will be subject to a host of factors. Labour’s understanding of this is that it was agreed that there will be inflation-linked increases, and that additional increases will be considered by the NMW commission in the context of the factors listed in the agreement, building on the current practice in all SDs of providing for inflation plus increases. Business however has publicly interpreted this in the opposite way – as meaning that the commission is not bound to increase the NMW at all! This is a critical matter which has to be resolved.

2. Working Hours

The value of introducing an hourly NMW, particularly for the most vulnerable, low-paid workers, could be seriously eroded if there are not mechanisms to ensure payment for a minimum number of hours, as well as premiums for part-time work which deter excessive casualisation. Otherwise, the objective of significantly increasing the wages of ultra-low-paid workers will be undermined in practice. The goal of striving for an initial minimum floor of R3,500 for all workers when the NMW is introduced needs to be advanced by the architecture of the legislation. While the agreement provides that workers should not be worse off after the NMW introduction, and hours should not be unilaterally reduced, this does not prevent the systematic extension of part-time work to counter the NMW impact, including to new workers.

Labour had therefore proposed that the COP consider possible mechanisms to combat abuses related to working hours. In addition to penalties to combat downward variation of conditions, this could include: the provision of a daily payment for a minimum number of five hours; a premium for working hours below eight hours a day; and/or weekly or monthly payment for work over a certain number of hours. These proposals aim to combat a situation where workers merely work for transport and lunch, and draws on existing agreements in sectoral determinations and collective agreements to combat such abuses.

The agreement to resuscitate the NMW Expert Panel to look at the options of payment for minimum hours and provisions in SDs and collective agreement kicks the can down the road, as the COP will still have to take a policy decision as to how deal with the critical matter.

3. Wage Inequality

Wage inequality in SA has reached astronomical proportions, with the latest surveys finding that South Africa is now the worst in the world in this regard. Our mandate as negotiators was clear: addressing wage inequality was a central challenge. The team was therefore called the Wage Inequality Task Team. But business over the last two years has refused to discuss this matter, initially on the basis that we first needed to agree on the level, and then on the basis that the matter was “too complex”.

Labour tabled a proposal on addressing wage inequality which has two key elements: As an urgent short-term measure, it proposed that we should amend the Employment Equity Act to provide for a prescribed maximum ratio between the top 5% and bottom 5% of earners. The Panel Report had supported Labour in this regard.

As a medium-term intervention, we proposed that parties should engage on the development of a comprehensive wage equity policy package (labour’s proposal outlines the elements such a package could contain). The NMW Commission could have a role in implementing and monitoring these interventions, but policy and legislative changes require decisions at the political level. Business declined to engage with this proposal, and it has been put into a process to report to the COP.

This is a strategic issue which needs to be part of the package. Failure to reach agreement on measures to combat wage inequality will lead to its indefinite postponement, and we risk ending up with a process like the social security discussion, where eight years down the line we still have no product. Government has not yet implemented even the voluntaristic provisions on income differentials in S27 of the EEA over the last 20 years. As the panel acknowledged, voluntarism has failed, it is now time for serious regulation to tackle wage inequality and lay the ground for a reconfiguration of our wage structure. Government, in line with policy in the ANC Manifesto, need to drive a process to this end, otherwise the NMW by itself will make a small impact in changing the wage structure.

Key issues have been put into processes

There are eight proposed processes emerging out of the COP discussions on the NMW which are important elements of the package and need to be completed before the agreement is truly finalised. These are: finalising an agreement on how to deal with minimum hours; considering a proposal on how to deal with EPWP workers in relation to the NMW; proposed measures to combat wage inequality; institutional arrangements for the NMW Commission; an enforcement strategy;  proposals on social security, particularly for adult unemployed; drafting of legislation; and development of an implementation plan with time frames to achieve the May 1 deadline.

We have dealt with three of these issues above: hours; wage inequality; and enforcement. The remaining issues are also important, but it is not possible to go into them here. Except to say that taken together these eight issues constitute a major element of the package.

Understanding the complexity of the agreement, and the issues at stake, helps to explain why the Cosatu leadership felt it was important to refer it to the Executive on February 28 for detailed consideration.

The range of issues still requiring to be addressed means that there is considerable space for engagement at the level of the COP, for consideration of issues of concern, as well as finalisation of the outstanding issues. Failure to address these issues head on could undermine implementation of the NMW, and may defer conflict further down the line in the months running up to the NMWs implementation. Greater clarity is needed now if we are to mobilise proper support for the effective implementation of the NMW. We have come too far down the road to snatch defeat from the jaws of victory. We dare not fail. DM