Wage inflation versus productivity: A growing threat to employment

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JEREMY MAGGS: Government has gazetted South Africa’s national minimum wage increase to R30.23/hour. That’s from 1 March. It’s a move that’s going to impact an estimated 5.5 million workers across the economy, including farm and domestic workers.

While the hike was widely expected, it lands at a time of intense cost-of-living pressure for households and tightening margins for employers, with compliance enforcement also ramping up.

Read: SA to raise minimum wage 5%, exceeding expectations

I want to discuss in a little more detail what this increase really means in practice. I’m joined by John Botha, labour relations expert, joint chief executive officer at Global Business Solutions.

John, a warm welcome to you. R30.23/hour sounds modest, in real terms, does this meaningfully protect workers against today’s cost of living?

JOHN BOTHA: The short answer to that, Jeremy, is you have to look at it in the context maybe of the last five years. As you know, the national minimum wage is renewed every year in March by the National Minimum Wage Commission.

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If you look at the increases on a compound annual growth rate, Jeremy, over the last five years, we’re looking at a 6.8% annual increase on a compound growth rate. Now, that is more than double CPI (Consumer Price Index), if one had to express it in that manner.

Whether or not it is sufficient to help the 5.5 million individuals with the massive cost-of-living increases that is not represented in the CPI.

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In other words, the cost of food, the cost of transport and so on. That’s a different question, and I don’t think we are quite there yet.

JEREMY MAGGS: For labour-intensive sectors, John. I’m thinking of agriculture, maybe even the hospitality industry. I wonder if this increase is absorbable, or do you think there is the danger, the risk that it could push some businesses closer to the edge, if not to closure?

JOHN BOTHA: Jeremy, the short answer to that is I think there are problems on the horizon, and I’ll tell you why. For example, domestic workers, we see a dramatic decrease in the number of domestic workers over the last three to four years who are employed.

If my memory serves me correctly, there are 200 000 to 300 000 domestic workers who are no longer employed. So we’ve seen a tremendous fall-off in the number of domestic workers employed.

Now, if that is an indicator, one must say, why is it that’s happening in households, for example. So consumer spending, disposable income is under pressure, as you indicated. Then on top of that you’ve got these regulatory increases, and then even workmen’s compensation, Jeremy, traditionally wasn’t extended to domestic workers.

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Then we had a Constitutional Court case that said domestic workers needed to be covered, because the unfortunate incident was a domestic worker fell into the pool and drowned. The Constitutional Court said, well, it’s unconstitutional not to have domestic workers covered.

I think what I’m trying to say is you’ve got this, and you touch on it when you open today’s discussion, is you’ve got this ambiguity. You’ve got the organisations that are under the hammer. We’ve got massive disruption with technology and automation and mechanisation.

Read: One in three domestic workers earn below minimum wage – report

We’ve got very low labour productivity in South Africa compared globally. Then on the other hand, you’ve got this rising minimum wage rate that, albeit very low still, it’s definitely having an impact on the labour market.

JEREMY MAGGS: John, we know that enforcement is becoming more data-driven, but how successful is it?

JOHN BOTHA: Enforcement is something that needs to be lamented on, Jeremy.

The enforcement of the national minimum wage, as with various other aspects of law, has been historically poor. There are lots of organisations not paying the national minimum wage.

I must say the Department of Labour have tried to step it up.

Their Inspection and Enforcement Services division is a lot more active than they used to be, and they’ve also changed the legislation to include, for example, under employment equity, that if a company is not paying the national minimum wage and they are found out, they lose their employment equity certificate, which means they lose access to business tenders.

Listen: Are you paying your domestic workers enough?

They are also trying to have this economic penalty as a potential threat. So for companies, especially reputable companies, if they don’t comply and they are caught out, they’re toast.

JEREMY MAGGS: We also know, John, that outsourcing and labour brokers are increasingly common in South Africa. I’d be interested to know where the legal liability sits when a minimum wage breach occurs.

JOHN BOTHA: That is a very good question, Jeremy. Organisations are trying to reduce their payrolls, and the only way they do that is to outsource, subcontract and use a TES (Temporary Employment Service) or labour brokers, as you indicate correctly. We see the migration of these new workforce models increasing dramatically.

The truth of the matter is when a labour broker or a TES is involved, the Basic Conditions of Employment Act appropriates joint liability between the client and the labour broker.

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Clients right now, and I think that’s where you’re heading, they’d better be talking to their labour brokers to adjust their pay rates, to adjust the contributions, to ensure they’re not found wanting, because if a broker is in breach, the client is automatically in breach as well.

JEREMY MAGGS: Just a final one, and maybe looking ahead, John. If wages keep rising, but productivity doesn’t. What gives first? Is it margins, jobs or prices?

JOHN BOTHA: Oh, my goodness. Jeremy, is I’ve studied this because I’m a keen academic in the context of disruption and the impact of that on the workplace. But the truth of the matter is the labour productivity in South Africa has been dropping tremendously.

If you look at the increase in the wage rates and the commensurate productivity trends, in fact, Nedlac (National Economic Development and Labour Council) published a beautiful graph last week or the week before, in their quarterly review, where they showed that there’s a massive disconnect between wage inflation and productivity. There’s almost an inverse relationship.

Now the more you’re paying; it’s almost the less productive organisations are becoming. So where does it give? In my view, technology, automation, artificial intelligence, mechanisation is going to be front of mind.

Robots don’t go on leave. They don’t injure themselves at work. They don’t have UIF (Unemployment Insurance Fund) and workmen’s compensation, and they are a fraction of the cost of remuneration for a year.

Read: Paycheques gutted by debt, particularly among high earners

You can pay R30 000 for a bot rather than R300 000 for a labour relations officer. So it’s going to give. Margins are under pressure. The labour markets are under pressure, I think we’re going to see unemployment grow significantly.

You see the automotive industry, like with the Nissan plant now, the Chery acquisition of that plant. Jeremy, I think we’re in for the high jump, and the sad thing is we still remain the most inequitable geography in the world when the Gini coefficient is brought into the mix. It’s a very sad situation, to be honest.

JEREMY MAGGS: John Botha, as always, thank you very much for the insight. Labour relations expert, joint chief executive, Global Business Solutions. I appreciate your time today. Thank you.

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