South African minimum wage; good or bad?

Man working with his hands

South Africa is one of the countries that implemented a national minimum wage. Globally, the majority of countries have some sort of minimum on the amount you can pay someone for work. Minimum wage can be implemented on a national, state or sector level. Although a minimum wage is widely adopted around the world, there are a few countries that do not see the need. These are mostly European and African countries.

What is the South African minimum wage?

In South Africa, the minimum wage is R20 per hour, which equates to R160 per day for a standard 8-hour workday. The monthly minimum wage is therefore calculated at R3 500 per month, which translates to R42 000 per year. After being approved by the Cabinet in 2017, this legislation came into effect on 1 January 2019.

The average salary in South Africa is R21 190 (for working individuals) while the national average is closer to R6 400. So the minimum wage is about 17% of what the average salary earner is taking home.

Why do we have a South African minimum wage?

The whole idea around a minimum wage is to stop the exploitation of workers. It gives businesses an absolute minimum amount that they can pay an employee that will still allow them to survive the month. The general public is also in support of a minimum wage, so it makes sense politically.

How does the South African minimum wage compare to other countries’?

Southern Africa

Let us firstly have a look at what the minimum wage for our neighbouring countries is at the southern tip of Africa. For comparison, I used a Rand to Dollar conversion rate of R14.74.

  • Namibië – None
  • Botswana – R8.55 per hour which equates to R1 505 per month
  • Zimbabwe – None, although the mineworkers have a minimum wage of R3 346 per month
  • Mozambique – The minimum wage varies per sector from R752 to R1 901 per month
  • Swaziland – The minimum wage varies from R892 per month (unskilled work) to R1 275 per month (skilled work)
  • Lesotho – The minimum wage varies by sector from R1 503 to R1 651 per month

It is evident that South Africa is paying significantly more than our neighbouring countries. This does not necessarily mean that people from these countries are worse off than in South Africa. One would have to crosscheck these salaries with the cost of living in these countries to get a better idea of the spending power these salaries have.

I’m not going to do it in this article since there are a lot of factors to discuss and the article might get extremely long. This Numbeo link is an excellent resource if you are interested in the cost of living for each country. I used data from Numbeo for my article on Geographic Arbitrage as well.

Internationally

The minimum wage for some other international countries can be seen below:

  • United Kingdom – R152 per hour or R26 700 per month
  • Australia – R200 per hour or R35 282 per month
  • Germany – R160 per hour or R28 120 per month
  • China – China has no national wage and the wages are set per province. Shanghai has a minimum wage of R5 640 per month, for instance

No minimum wage

There are several countries that do not have a minimum wage. In the next section, I will also look at what effect not having a minimum wage has on a country. Here are some of the countries.

  • Brunei
  • Liechtenstein
  • Qatar
  • Tonga
  • United Arab Emirates
  • Denmark
  • Austria

Internationally there is a massive debate regarding the effectiveness and the need for a minimum wage. Today I simply want to state both sides of the argument so you can form an opinion for yourself.

The arguments for minimum wage

Strengthens economy

Implementing a minimum wage should put more money in the worker’s hands. This, in turn, means an increase in spending since people earning minimum wage tend to spend most of their money, as opposed to saving it. So, in theory, this should increase the average income for companies to compensate them for the additional money they spent on salaries.

Better employment circumstances

Workers who are paid fairly have better morale and are therefore more productive. Employees who are happy at work also tend to stay with employers for longer. This should reduce the need for training new personnel and reduce costs in the long run.

Generational wealth

Workers who earn a living salary have more money to spend after fulfilling their basic needs. One of the things people typically spend money on is better education for their kids. This increases their marketability and therefore their earning potential. So investing in your kid’s education creates generational wealth. I wrote an article on the cost of public and private schools for further information

The arguments against minimum wage

Unemployment

Implementing a minimum wage makes employing people more expensive, but you don’t necessarily get more work done. If the cost of employment becomes too high, workers can be replaced by software or machines. If you make the minimum wage too high, you run the risk of pricing yourself out of the market.

At R15 an ice cream it makes sense. Does it still make sense at R200 an ice cream? At some point you decide the ice cream is not worth the money. Unless ice cream can be a status symbol it does not make sense. That is when you get Economic Bubbles like the tulip bubble.

Increasing the minimum wage can lead to layoffs or companies going under. Both of these increase the unemployment rate. In Europe, for instance, there are 7 countries with no minimum wages and 21 countries that do specify a minimum wage. In the countries with a minimum wage, the average unemployment rate is 11.8% while the unemployment rate for countries with no minimum wage is 7.9%, according to the CATO Insitute.

Whether the minimum wage causes unemployment, however, is a subject for debate. Because there is a correlation between minimum wages and unemployment is not proof of causality. Both the lack of minimum wages and the low unemployment figure can simply be the result of a strong economy.

Outsourcing

If employees become too expensive work is outsourced to companies or countries that can do it cheaper. Take the steel industry as an example. Although the demand for steel internationally has grown, the steel production in South Africa is on a decline. This is simply because it is cheaper to export iron ore to China and then to import steel back into the country. This has lead to job losses across the industry and unfortunately affects the low-income households the most.

My opinion on minimum wages

I think a South African minimum wage is a necessity to at least stop the exploitation of workers. Evidence suggests that the unemployment figure is not as severely affected by a minimum wage and is more dependent on the economy of the country.

However, specifying the minimum is not an easy task. There is a minimum wage sweet spot. Too low and people cannot survive. Ridiculously high and people are left unemployed. Are we hitting that sweet spot? I think so. Even though our unemployment is rather high, I don’t think it is the result of our minimum wages.

Be safe out there,

Hendrik

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Endnote

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