Higher wages do more to lift growth than company profits

January 15, 2016, 7:00am

The source of the disagreements over the introduction of a minimum wage lies in what economists call "profit-led" versus "wage-led" approaches to investment, says the writer. Picture: AFP PHOTO / FABRICE COFFRINI on Business Day Live

By Ayabonga Cawe, Business Day Live

THE who’s who of the world’s political economy cognoscenti will descend on the Swiss ski resort of Davos during the next week or so in the lead-up to the 2016 World Economic Forum, an opportunity for opinion leaders, policy makers, corporate decision-makers and analysts to hobnob in an event for the well-heeled.

The issue of inequality will surely be on the agenda, and rightfully so. Yet in SA live crossovers to Davos will provide little reassurance to domestic actors in the political economy, especially as they relate to how one of the most unequal societies in the world tackles its domestic socioeconomic challenges in a local elections year.

One of the most polarising issues in that quest has been the debate over a national minimum wage as an intervention aimed at reducing inequality. Among the major causes of inequality are income and asset disparities, and not necessarily only unemployment. It stands to reason, then, that the suggested wage policy would be expected to have an effect on income inequality and thus narrow the wage gap and asset (tangible and intangible) deficits that have reproduced much of the inequality we fret about.

Job creation is important, but the issue of the quality of remuneration and working conditions cannot be wished away. So, it makes sense that a national minimum wage is seen as a timely intervention by some, and an unnecessary one by others.

The 1913 Land Act, influx control policies and a range of other injunctions created a system in which entrenched material inequality between races became the norm. Such dispossession developed an environment wherein wage employment became the primary, if not the only means of material survival for many. More recently, drawing on the 2012 National Income Dynamics Study, Arden Finn finds that wages overtook government grants as the largest contributor to household income at a monthly household income of about R580.

With chronic unemployment, his additional finding that wage income is a relatively small part of household income in the poorest households is not surprising. His paper also found that the role of remittance incomes diminishes as we move from poorer to richer households, with investment income only being substantial for homes in the top decile. What these findings show us is the importance of wages for households with wage earners, and the importance of government transfers in households with no wage earners.

Moreover, it highlights the disparity in assets between poor and rich households and the importance of remittances in poor (especially rural) households as a bridge between household needs of social reproduction and government transfers.

Conversely, an argument made earlier by Harold Wolpe about the function of rural homelands in black urban life and in SA’s history of racial capitalism is of interest.

"The extended family (mostly the female members) in the reserves is able to, and does, fulfil ‘social security’ functions necessary for the reproduction of the migrant work force. By caring for the very young and very old, the sick, the migrant labourer in periods of ‘rest’, by educating the young, etc, the reserve families relieve the capitalist sector and its state from the need to expend resources on these necessary functions."

It is the above costs of "social reproduction" of the labour force that are uncompensated by wage determinations and are often partially covered by the state.

The source of the disagreements over the introduction of a minimum wage lies in what economists call "profit-led" versus "wage-led" approaches to investment, output growth and employment creation. Profit-led approaches argue that the benefits from higher domestic demand due to higher wages and greater spending power are outweighed by the decline in investment due to lower profits. The assumptive logic inherent in the profit-led approach, as economist Jayati Ghosh argues, is that greater profitability implies greater investment.

"In the last two decades, across the world people were told that it is necessary to control or restrict wage growth ... it was supposed that rising profit shares are required to ensure higher rates of investment, which in turn generate higher rates of economic activity and expansion over time. It turns out this has simply not been the case."

It is, surprisingly, the same wage restraint thesis that finds expression in the National Development Plan, which expects organised labour to moderate its demands in pursuit of growth that, it is assumed, will be equitably shared. It is a pity that the evangelists of "wage restraint and repression" have had an overriding influence on policy makers and the discourse in general, when evidence exists to the contrary.

The International Labour Organisation World of Work 2011 report emphasises this disconnect between growing profits and productive investment in an increasingly financialised economy, with profits going towards financial assets rather than investment in the job-creating real economy. Studies by the United Nations and the International Monetary Fund show that higher wage shares, rather than growing profit shares, spur growth. This makes sense as, unlike the employed who use their money mostly for consumption, as growing financialisation shows us profit shares are largely not reinvested in production.

The National Minimum Wage Research Institute at Wits University argues that the income rises stimulate growth through increased spending, with attendant drops in income inequality, unemployment and poverty. One of the major causes of inequality is the increasing returns to owners of capital relative to workers. We didn’t need Thomas Piketty to tell us this, it is evident from a glance at SA’s labour market and its associated casualisation, precarious work, industrial distrust and retrenchments.

Do we ever ask what policy levers governments that have reduced inequality have used, or are the examples of countries such as Brazil, Germany, Australia and the UK incomparable to our case? The proposed national minimum wage, unlike profit-driven incentives to investment and output growth, is a proven starting point in the policy arsenal required to reduce inequality. It needs to be an initial policy intervention that can restore the dignity of black workers in conjunction with others — asset transfer through land reform and prescribed assets, labour-intensive industrial and trade policy and social wage interventions such as subsidised public services and integrated spatial development, attending to the cost drivers of working households.

It offers an opportunity to incentivise employers to play a role in fighting inequality, by filling the gap in meeting household needs, between government transfers, remittances and other social transfers. Perhaps through organised intellectual, political and economic pressure and activism, we can ensure that in Davos, those of influence will hear the evidence rather than retreat into the cold ambivalence of privilege.

• Cawe is the economic justice manager at Oxfam SA