Sectoral minimum wages in South Africa: disemployment by firm size and trade exposure

Stellenbosch Working Paper Series No. WP19/2018
 
Publication date: December 2018
 
Author(s):
[protected email address] (Department of Economics, Stellenbosch University)
[protected email address] (Department of Economics, Stellenbosch University)
 
Abstract:

This paper measures the impact of South African minimum wages on small and large firm employment in a sector that is exposed to international competition (agriculture) and one that is not (retail). Our results highlight that small firms in a tradable sector are the most vulnerable to minimum wage legislation. In particular, small farms shed jobs, while larger farms employed more unskilled workers as a result of minimum wages. Small firms were more affected by the minimum wage as they employed a higher proportion of low-skilled, low-wage workers. In contrast, large farms employed a lower proportion of low-skilled workers and used a more capital-intensive production process and were thus less affected by the legislation. While this shift represents a short-run response to minimum wages, it intensifies a long-run movement towards fewer, larger, more capital-intensive farms. Retail firms, on the other hand, do not exhibit the same behaviour, with zero employment losses in both small and large firms. This difference in result can be explained by the fact that firms that face international competition cannot easily increase prices when faced with wage increases. Non-tradable sectors, such as retail, can increase prices and shift the burden of higher labour costs onto the consumer as they do not face international competition. The effects of minimum wages in South Africa is, therefore, more complex than what previous research shows. We argue that an undifferentiated national minimum wage can result in intra-industry concentration and inequality could grow. This is true even if the economy-wide impact of a national minimum wage could be potentially benign.

 
JEL Classification:

F16, J43, J81, K31, L11

Keywords:

Minimum wages, employment effects, firm size, international trade, concentration

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BER Weekly

3 August 2020
The week started with news of the confirmation of the $4.3 billion (bn) loan from the International Monetary Fund (IMF) through its Rapid Financing Instrument. In the process of obtaining the loan, the government re-committed itself to the fiscal consolidation outlined in the supplementary budget presented in June, including to introduce zero-based...

Read the full issue