FEDUSA Conference 27 February 2011

1. FEDUSA Conference27 February 2011 Effect of Minimum Wage Setting in Vulnerable sectors in South Africa

2. Structure • Presentation look at what we have achieved in order to provide some policy direction • Background • Sd’s and wage levels • Sd’s and employment • Sd’s poverty alleviation • Sd’s and enforcement • Some policy direction

3. Background

4. Factors to be considered when setting minimum Wages • BCEA clearly sets out these factors: - Ability of the employer to continue - Effects on employment - The alleviation of poverty - Cost of living

5. Which sectors? • In South Africa there are currently eleven sectoral determinations, or wage minima, governing vulnerable workers in different sectors of the economy, namely Forestry, Agriculture, Contract Cleaning, Children in the Performance of Advertising, Artistic and Cultural Activities (under fifteen years of age), Taxi Operators, Civil Engineering, Learnerships, Private Security, Domestic Workers, Wholesale and Retail, and Hospitality.

6. So does it make sense • In order to make sense we need to look at the impact of sectoral determinations on wages, poverty and employment levels. • Enforcement of minimum wages remains a concern, particularly in developing countries like South Africa, • We therefore also needed to analyse compliance of employers with minimum wage legislation in regulated sectors.

7. Wage levels

8. What did we want to determine? • Necessary to look at two approaches in order to analyse the impact of minimum wage legislation on the wage levels of workers, 1- Whether the actual wages earned by workers were higher than the mandated minimum wage, and 2- Whether wage levels of covered workers have increased as a result of the introduction of minimum wages in the specified sectors.

9. And we found • Overall real wages of covered workers increased significantly at 2.1 percent per annum between 2001 and 2007. • The rise in real wages was driven by the Domestic and Farm worker sectors, which experienced real wage increases of 6.6 and 7.3 percent respectively. • The significant rise in wage levels in these two sectors may indicate that minimum wages have had an effect on vulnerable sectors. • Although the mean wage in these sectors has risen, Domestic and Farm workers still remained the lowest paid individuals in the labour market in 2007.

10. What do the figures say Change in real monthly wages by sectoral determination (covered workers only).

11. Employment Effects of Minimum Wages

12. Employment effects • Sectoral determinations covered around one-third of employees in South Africa in both 2001 and 2007. • The largest covered sector in 2007 was the Domestic worker sector, with approximately 1.2 million employed individuals, followed by the Retail sector with 802,242 individuals. • The smallest sectors were the Civil Engineering and the Forestry sectors with approximately 59,926 and 17,373 employed workers respectively. • Sectors which experienced significant growth in employment were the Retail, Domestic worker, Taxi, Security and Hospitality sectors. The sector to experience the fastest growth in employment was the Taxi sector, which grew at 12.5 percent per annum.

13. Employment effects • In order to examine the relationship between changes in employment and wage levels, we used simple wage-employment elasticity estimates. • The simple employment-wage elasticity estimate for the 2001 to 2007 period was, somewhat surprisingly, 1.4, suggesting that a 1 percent increase in wage levels was accompanied by a 1.4 percent rise in employment. • Most of the sectors yielded a positive employment-wage elasticity estimate, barring the Farm worker, Forestry, Taxi, and Security sectors, which yield a negative relationship between employment and wages.

14. Employment effects Changes in employment across sectoral determinations, September 2001 to 2007

15. Employment effects • At the aggregate level that minimum wages have been effective in raising real wages. Using simple elasticity estimates yielded a positive relationship at the aggregate level between employment and wages, and between employment and enforcement of minimum wages. • The changes in employment over the 2001 to 2007 period are a function of a number of factors, including the change in output, employment, and enforcement over the period. Overall, employment is an increasing function of changes in enforcement (in other words, a decrease in violation), wages and labour demand (as measured by output). However, the nature of this relationship depends on the sector of employment.

16. Minimum wages and poverty alleviation

17. Poverty alleviation • Since poverty alleviation is a critical tenet of the criteria The study then turned to a more formal analysis of the impact of minimum wages on poverty. • The definition of poverty employed was wage poverty, since the use of the LFS dataset to measure poverty does not allow us to measure income from grants, and household assts. Nor can we take into account the living conditions of workers, for which data is not available. • Hence, poverty was defined as wage-related poverty, and this is relevant to the analysis, given the aim of this study is to investigate the impact of sectoral determinations on wages.

18. Poverty alleviation • Firstly, in identifying the individual poverty effects of minimum wages, we looked at the proportion of covered and uncovered workers by household poverty status before and after the institution of minimum wage legislation. • In other words, the study analysed the impact of minimum wage legislation on the poverty status of individuals, measured by their household poverty. • This involved grouping all households in the economy into income groups by per capita household income. The households were thus grouped into ‘ultra-poor’ (below the 25th percentile of the household per capita income distribution), ‘poor’ (between the 25th and 50th percentiles), and ‘non-poor’ households (above the 50th percentile). • This allowed us to draw some broad conclusions about the type of households within which workers earning minimum wages reside, and whether the poverty status of these households have on aggregate improved before and after institution of minimum wage legislation.

19. Poverty alleviation • Individual poverty levels in South Africa are high, with the highest poverty levels found amongst workers in the Domestic, Farm and Forestry sectors. • There was a decline in poverty during the 2001 to 2007 period. The decline in poverty is evident across all sectoral determinations, with the exception of the Taxi sector and the Civil Engineering sector, which seem to have witnessed an increase in the percentage of poor. The decline in poverty levels is most apparent for workers covered by the Domestic, Farm and Forestry sectoral determinations and least evident for those employed in the Contract Cleaning sector. • Households with workers dependent on wages subject to minimum wage legislation are likely to be poor, whereas households where wage earners are not covered by sectoral determinations (their wages may for instance be set by bargaining council agreements) are less likely to lie below the poverty line. • Households with Domestic and Farm workers experienced a significant decline in poverty levels, whilst a significantly larger proportion of Contract Cleaning households became poor between 2001 and 2007.

20. Important however!!!! • Minimum wages, poverty and compliance • An increase in enforcement of the minimum wage resulted in a decline in poverty. The results showed that if everyone currently earning below the minimum wage were instead allocated their relevant minimum, poverty levels would decline. The poverty gap measure, that is, the distance below the poverty line, also shows a decline when full compliance is assumed. • However, full compliance with the minimum wage is not enough to completely eradicate poverty. Even if the minimum wage were to be perfectly enforced, poverty levels would not decline to zero. CAUTION AGAIN • Whilst an increase in enforcement of the sectoral minima would lower poverty, the minimum wage is not the only instrument needed for poverty eradication. AND • Minimum wages may not be the only source of income for a household, and our analysis does not allow us to control for income from grants, assets, etc. Indeed, non-wage income may be increasingly important at the bottom end of the distribution.

21. So it is not only about wages • Sectoral Determinations and non-wage outcomes • The working conditions of workers covered by sectoral determinations was also looked at: • Whilst overall there was an improvement in working conditions amongst workers covered by sectoral determinations during the 2001 to 2007 period, Domestic workers remained the worst off, along with workers in the Farm, Forestry and Taxi sectors. . Domestic workers were the least likely cohort to receive benefits such as paid leave, a written contract, pension/retirement, UIF, and medical aid, followed by Farm, Forestry and Taxi workers. On the other hand, Civil Engineers were most likely to receive these benefits in both years. • Overall, the proportion of non-self employed workers regulated by a sectoral determination who were entitled to paid leave grew significantly over the period. • The proportion of workers with a written contract also increased significantly during this time, as did the proportion of workers with an employer paying UIF contributions on their behalf, or contributions to a pension/retirement fund. • The proportion of workers entitled to a medical aid benefits remained low between 2001 and 2007, at under 12 percent. • Farm workers worked the longest hours per week in 2007, that is, 47.8 hours, whilst Domestic workers worked the shortest hours, that is, 38.5 hours per week. • There was a significantly decline in mean weekly hours worked between 2001 and 2007.

22. Compliance

23. Compliance • Compliance with sectoral determinations • We next attempted to measure compliance with sectoral determinations, and investigated the reasons for non-compliance. • We used an index of violation that measures both the number of wages falling below the minimum as well as how far below the minimum wages fall.

24. Compliance • Non-compliance or violation in South Africa is high. The high estimates of violation are reflective of a significant number of employers in South Africa who are violating minimum wage laws across all sectoral determinations. • In 2007, 45 percent of all workers covered by sectoral determinations were not being paid the legal minimum. Non-complying employers paid wages that were on average 36 percent short of the legislative minima in that year. • Security workers were most violated cohort in 2007. 67 percent of Security workers earned sub-minimum wages in 2007, which is the highest estimate amongst all sectors. Civil Engineers recorded the lowest levels of violation (9 percent). • Although non-compliance levels of employers with minimum wage legislation in South Africa are high, there is some evidence to suggest that non-compliance declined during the 2001 to 2007 period. The proportion of violated workers fell from 55 to 45 percent, and the mean gap between their wages and the minima declined from 45 percent to 36 percent during this time. • The decline in violation was most notable amongst Domestic and Farm workers. Whilst 63 percent of all Domestic workers were earning below the minimum in 2001, by 2007 the measure of violation for this cohort had dropped to 39 percent. The figures for Farm workers in turn yield a drop in non-compliance rates from 78 percent to 55 percent. • The decline in non-compliance suggests a positive impact of the ECC sectoral determinations on wage levels in South Africa, and an improvement in enforcement during the 2001 to 2007 period.

25. Conclusions on compliance • Collectively, the results suggested that there are a range of variables contributing to non-compliance, including individual characteristics such as education and age, as well as sectoral, contractual, and spatial characteristics. • However, it seems that there are two classes of variables driving the likelihood and the depth of violation. • On the one hand, firm-level and contractual factors seem to play an important role, notably the nature of the contract, union membership, the length of tenure, and the formality of the firm. • On the other hand, spatial variables also play a significant role. • Two key results here are the significance of the labour inspectorate deployed in predicting the size of the violation, as well as the importance of the local unemployment rate

26. Broad policy directions Thinking behind levels of minimum wages need to be reviewed!!!!! We have not missed the boat at all but did we not err on the side of caution? • Attention now probably need to shift to thinking around provident funds, medical schemes etc • Drive increase to enforcement and full compliance

27. THANK YOU