Are wage adjustments an effective mechanism for poverty alleviation?: some simulations for domestic and farm workers

The South African Department of Labour's recent call for public submissions and public comment on the issue of minimum wages and conditions of employment for domestic and farm workers has bought these issues to the fore. An analysis of the first of these two issues, namely wages, will place into sharp focus the stringent trade-offs faced by the Department of Labour in this part of the workforce. This paper therefore attempts a very basic simulation exercise to test some of these hypotheses concerning the functioning and response behaviour of the labour market.In trying to focus on the poor in the labour market, the study chooses three unskilled labour categories, with the emphasis being on the two most indigent groups amongst the employed, namely domestic workers and farm workers. It is amongst these two groups, that the trade-offs between poverty reduction and employment losses are most starkly evident.<B>Conclusions:</B> In essence, the analysis suggests that poverty eradication amongst domestic and farm workers cannot take place solely through a minimum wage policy. This is not the problem of minimum wage legislation per se, but rather the very high incidence of poverty found amongst domestic and farm workers. Ultimately, if the Department of Labour were considering a minimum wage policy directed at reducing poverty levels amongst these workers, it would not serve the purpose of significant poverty alleviation amongst its target population. This is true, it must be remembered, irrespective of what employment losses may occur from the minimum wage as well. Should the Department of Labour opt for a modest minimum wage, the poverty reduction consequences would of course be minimal and so too would the disemployment effects. The Department would implicitly then be issuing a 'moral signal' to employers - that improved wages for these workers are to be striven for. Such a wage would set a first-step benchmark for good wage practice amongst employers. Indeed, such an initial minimum wage may set a positive trend, and see employers gradually increase the wages paid to these workers. Ultimately, given the above figures, this option may be the best and most optimal available to the Department.