The Minimum Wage In South Africa

From a recent post on the World Bank’s Future Development Blog (excerpt):

A Tale of Two Impacts: Minimum Wage Outcomes in South Africa
Haroon Bhorat

…The evidence for South Africa, some twenty years after the demise of apartheid, is equally compelling. In a two-part study, my co-authors and I find an intriguing set of contrasting economic outcomes, from the imposition of a series of sectoral minimum wage laws….Currently, the economy has in place 11 such sectoral minimum wage laws in sectors ranging from Agriculture and Domestic Work, to Retail and Private Security….

…So what were these results? Well, in the case of Agriculture, the minimum wage had a swift and large negative impact on employment. Employment fell in the year after the imposition of the minimum wage by close to 150 000 workers, representing a 17% decline….Farmworkers gained however, as our estimates show that farmworker wages in the post-law period, increased on average by 17.6%. Finally worker protection improved, as the share of workers with a written employment contract, rose sharply from 34% in the pre-law period to reach 57% by the end 2007.

In contrast however, our results for South Africa’s remaining 5 minimum wage schedules, for which we are able to measure impact – suggest a far more benign impact on employment. Econometric evidence for the Retail, Domestic Worker and private security sectors actually suggest that the probability of getting employment in these sectors was significantly higher in the period after the introduction of minimum wages….employers may have started to reduce the usual work hours of employees in order to afford higher hourly wages. However…the Retail, Domestic work and Security sectors showed an increase in real hourly wages that was sufficient to outweigh any reductions in hours worked – workers ended up being better off in the aggregate. Workers in the Forestry and Taxi sectors appear to have been unaffected in real income terms….

…Ultimately though, these two studies illustrate the care that needs to be taken when attempting to pre-judge the potential economic consequences arising from the imposition of a minimum wage….

I envy them – we simply don’t have the publicly available data to do this kind of study. My own attempt was fairly rudimentary, and conducting it at an aggregate level obviously masks important effects. It’s clear from the South African experience that the imposition of a minimum wage alone is not always necessarily bad – or always positively benign.

The answer, as with many economic questions, is, “it depends”. It depends on what level the minimum wage is set, relative to the market clearing wage. It depends on the demand and supply elasticity of labour to wages. It depends on the marginal rate of substitution between capital and labour. It depends on the strength of enforcement, and the leeway given to businesses to adjust their cost/production structures.

For now, I don’t think the overall impact in Malaysia will be too detrimental – the current level is low enough relative to average incomes that aggregate disemployment effects should be minimised. But drilling down, some sectors are likely to be badly affected while others will be relatively untouched. But given the lack of data, it will be hard to figure out by just how much.