What should the economy of tomorrow look like?

An argument for moving the national minimum wage closer to a living wage, and other proposals.

A study conducted by Oxfam indicated that the wealthiest 26 people in the world held as much wealth as the poorest 50% of the world population. Unfortunately, this is not fresh news and rather represents a persistent and increasing gap as evidenced by the Oxfam report.

According to the World Bank, between 1960 and 2017 the distribution of population across income groups saw a significant proportion of the population move into lower income groups relative to 1960.

Table 1: Distribution of Population across Income Groups (1960 – 2017)

Source: World Bank

Table 1 illustrates that since 1960 there has been a significant increase in the proportion of the population that fall within the lower-middle or low-income groups. The article titled ‘Starting over again’ by The Economist, indicates that since the 1940s there have been at least three fundamental shifts in global macroeconomics, with a possible fourth shift on our doorstep given how the present approach to macroeconomics has faltered during the global financial crisis and currently during the Covid-19 pandemic. The question though is what should this next macroeconomic shift be characterised by?

The author argues that at the core of this next phase should be returning to full employment as the impact of the two recent global economic crisis (2008 and present) have been felt the most by the lower income groups. Given South Africa’s unemployment rate of 30.1% (Q1 2020) which is expected to increase to 35.3% according to the IMF, this shift would be particularly welcome within the South African economy.

South Africa’s economy over the last two decades has been characterised by a relatively small tax base, a high ratio of grants paid per personal income taxpayer, high unemployment rates and moderately low economic growth. Clearly this is not a sustainable trajectory for a developing economy and ideally any changes in macroeconomic policy would seek to reverse these trends.

If macroeconomic policy was geared towards aggressively promoting employment it could potentially lower unemployment, reduce the reliance on grants, increase the span of the tax base, raise productivity and hence economic growth.

When it is stated like that it sounds simple, but in reality, there are an infinite number of factors that influence whether such a policy is feasible and whether it will be effective. This article does not presume to have the answers to all these questions but rather seeks to explore the ideal that could unfold if macroeconomic policy that is geared towards increased employment was effectively implemented.

The ideal

The national minimum wage of R20 per hour (subject to stipulated exclusions) was implemented in 2019 and was increased by 3.8% to R20.76 in 2020. Assuming an eight-hour workday and a 22-day work month, this translates into R3 653 per month. The current tax threshold for an employee below the age of 65 is R6 583 per month (R79 000 per annum). This implies that although the minimum wage does afford some protection to the employee against exploitation, this minimum wage does not provide any benefit to the fiscus (in the form of personal income tax) as the minimum wage falls below the tax threshold.

In the build up to the introduction of the national minimum wage the concepts of a minimum wage and a living wage were debated at length. The views expressed within these debates differed significantly based on whom you were asking but one common thread throughout the debate was the recognition that the minimum wage is not synonymous with a living wage.

According to www.tradingeconomics.com the living wage in South Africa is estimated as R6 570 per month. A similar estimate comes from www.living-wage.co.za that estimates this figure as R6 806 per month. Considering that this is almost double the existing minimum wage rate, surely it would be expected that this would result in widespread job losses?

This is not necessarily the case according to an academic paper titled ‘A National Minimum Wage for South Africa’ (Issacs, 2016). The author argued:

“A national minimum wage in South Africa, if set at an appropriate and meaningful level, can achieve its central objectives of reducing working poverty and inequality. As the ILO insists, economic factors must also be considered. This report shows that a national minimum wage can also support economic growth. Minimum wages do not aim to raise employment levels – for that, other policies are needed – but a national minimum wage can be implemented without significant employment effects.”

According to the author, the implementation of a minimum wage would increase the average wage at a faster rate than without a minimum wage, and lower poverty levels. The knock-on effect of this would be increased average household consumption which stimulates the economy. The author goes further and cites examples of where a minimum wage has reduced inequality in the formal and informal sector in Indonesia, Russia, China, India and Europe.

The paper states that “The weight of evidence points to little or no employment response to modest increases in the minimum wage.” If this observation holds within the South African economy then the “sweet spot” which maximises the benefit of balancing the minimum wage and employment should be investigated. If it is possible to increase minimum wages to a level similar to that of a living wage that can contribute to the personal income tax base (the tax threshold would need to be adjusted lower) this would go a long way to widening the tax base, reducing the reliance on social grants and increasing consumption in the country.

This would reduce the pressure on the fiscus and assist South Africa’s macroeconomic stability.

Implementing pro-employment macroeconomic policies, expanding the tax base by moving the national minimum wage closer to a living wage and lowering the tax threshold to expand the tax base sounds like an easy enough task. The reality is that there are many practical considerations that need to be take into account before such a policy can be practically considered.

However, if such a policy is practically feasible, it only seems logical that we should invest time and energy into exploring this option further.

Bryden Morton is an executive director and Chris Blair CEO at 21^st Century