The difficulties posed by a minimum wage

The National Minimum Wage panel has stressed the pros of a minimum wage. Now for the cons.

Global farming - Dr Koos Coetzee

Vice-president Cyril Ramaphosa recently announced that a minimum wage of between R3 440 and R3 500 a month had been proposed for South African workers. The agricultural sector would have to pay 90% of this – R3 096 a month.

The National Minimum Wage advisory panel made its recommendations in a hefty 124-page document. It contains many words about the benefits of a minimum wage, but very few about the possible negative effects.

Agriculture contributes only 2,4% to the national GDP. However, it employs about 4% of the economically active population. The sector spends an estimated R17 billion, or 10,4% of total farming costs, on wages annually. Any salary changes will therefore affect agriculture.

Labour can be viewed from either a social or an economic perspective. Most farmers probably take both into account.

Labour as a resource
From an economic perspective, labour is a production resource like capital or land. It can be replaced with machinery, in which case fewer unskilled and more skilled workers are needed. In this sense, the economic calculation is a matter of comparing the running cost of machinery with the cost of the labour it replaces.

Other factors that a farmer will consider are the red tape involved in managing labour and the danger of strikes and unrest.

In short, higher minimum wages will reduce jobs, especially for unskilled workers. Skilled workers will be unaffected, as in most cases they earn a far higher salary than the proposed minimum wage.

The need to work
There is also a social perspective to labour. Most farmers take good care of their workers. In many cases, the core of a farm’s workforce have been living on the property for many years. The children of farmworkers usually leave the farm to work elsewhere, and in many cases the farmers help pay for their education.

However, there are some workers who cannot find work on the open market. In this case, farmers often employ them as unskilled labourers, but frequently cannot afford to pay them a minimum wage.

Most of the people who sit on the side of our roads hoping for someone to hire them for a day-job could probably be accommodated on farms, but not at R3 096/month.

Minimum wage vs sectoral wage determination
The panel did discuss the possibility that a minimum wage would result in higher unemployment. One doesn’t need a sophisticated economic model to realise this; if it becomes too expensive to employ a worker, a farmer will simply not do so.

The good news is that the panel was aware that the level at which a minimum wage is set is crucial in determining its impact on employment levels, and approached this aspect with caution.

Any increase in agriculture’s total wage bill will affect both profitability and employment in the sector. However, as Agri SA’s Johan Pienaar points out, the real difference between the applied minimum wage and the expected sectoral wage determination will be only R123/month in 2017.

If one also considers that the majority of farmers pay more than the minimum wage to their workers, criticism of the proposed minimum wage seems premature.

While the proposed minimum wage would probably result in job losses among unskilled workers, its real effect on the agricultural payroll would be slight, and hence acceptable to farmers.

Where farmers are in financial difficulties and cannot afford the higher wages, they would still have access to Section 50 of the Basic Conditions of Employment Act. This grants exemption from complying with the minimum levels.