Who is going to pay for South Africa’s national minimum wage?

Deputy president Cyril Ramaphosa has announced South Africa’s plans to phase in a national minimum wage at R3,500 per month – but has not said much to address the key question: who is going to be paying for this?

The national minimum wage (NMW) debate has been raging for some time, with supporters and critics coming forward with their views on the most appropriate level for monthly wages.

According to analysis from financial research group Nomura, a NMW set around the lowest expectation (R3,000-R3,500) is a more positive outcome in the report, as it carries a lower risk for South Africa – but risks are certainly present.

Chiefly, government is expecting businesses to absorb the cost through reducing profit margins to accommodate the NWM. “However, businesses simply don’t operate like this,” Nomura said.

The national minimum wage will likely get passed onto:

• Investors, through lower dividends (including South African pension funds)
• Government, through lower taxes, or
• Consumers, through higher prices.

It has also been widely accepted that businesses will also look to reduce their costs to accommodate a NMW, which will be accomplished through effectively cutting their workforce.

Estimates from the University of Cape Town show that there could be 500,000 job losses as a result of the NMW – while National Treasury has estimated that 715,000 jobs could be lost.

Nomura says that while job losses are a risk, the number of jobs is unlikely to change by such huge margins. Rather, future hiring rates will probably drop; total hours per employee may fall; and non-wage benefits will likely also be cut.

This impact will take time to be felt, due to the project’s “phase in” timelines – where the NMW is only expected to be fully implemented by mid-2019.

South Africa is not ready

One of the biggest problems Nomura sees with the NMW is factoring in the fact that South Africa is not an ideal market for such wage restrictions to be in place.

“A NMW can only work where there is decent national productivity growth, flexible labour markets, a low share of non-wage compensation by employers and low unemployment. South Africa fails on all of these,” the group said.

“It has minimal productivity growth, very poor labour market flexibility, a high share of non-wage compensation by employers (medical, housing, dependents education support etc) and 36% true broad unemployment,” Nomura said.

In fact, the group said that there is “significant anecdotal evidence” that employers have cut back on non-wage benefits in response to previous sectoral minimum wage increases (especially in agriculture) and will do so further for NMW.

“As such while a NMW may well be accepted it will likely result in households being worse off in absolute terms, possibly working fewer hours with poorer terms of employment,” Nomura said.

“Fundamentally, we worry that an economy with such weak private investment growth on such weak sentiment will not be able to support a NMW without adverse effects. We see this as a step backwards not a step forwards – it is not a reform.

“It is a policy choice to form a social wage with business paying more to some people but government having to provide the ultimately backstop for everyone through social grants and tax redistribution,” Nomura said.

Read: How South Africa’s proposed R3,500 minimum wage compares to the rest of the world