This book focuses on South African labour market dynamics, fiscal policy and their interaction with selected macroprudential tools and monetary policy . South Africa has long grappled with the problem of jobless growth alongside consumer price and nominal wage inflation that are persistently at or above the upper end of the inflation target band. Recent developments include:
- Increased focus on income inequality and poverty: income inequality and poverty have worsened, such that government has intervened in some sectors by introducing and phasing in a national minimum wage.
- Fiscal policy is constrained: since the global financial crisis and recession, fiscal policy has become constrained in the degree that it can be used to counter sluggish growth.
- Sovereign credit downgrades: A string of sovereign credit downgrades and a threat of further downgrades post-2009 have raised the cost of borrowing and thus further complicating the fiscal policy space.
- Call for reforms in product and labour markets: The confluence of the preceding events and other economic developments has resulted in recommendations to implement structural reforms in product and labour markets. Similarly, policy rates as monetary policy tools are known to be blunt instruments and have proven to be of limited potency or even entirely ineffective under certain economic conditions.
- Interactions between the role of macroprudential and labour market conditions and reforms: The role of macroprudential tools that can be used to complement monetary policy tools, fiscal policy, product and labour market reforms has become a topical and pertinent research area for academics and policymakers alike.
1.1 Why Is This Book Relevant to Current South African Issues?
First, the book brings empirical evidence to a discourse in which a number of explanations and hypotheses have been largely based on anecdotes regarding the nature of South African labour markets. However, the interactions amongst structural reforms in labour markets, fiscal policy, financial stability and monetary policy remains unexplored. In particular, the role of structural reforms in labour markets and how they interact with other policy tools remains a largely unexplored area in South Africa and is thus misunderstood and highly contested. The issue of the impact of the national minimum wage is particularly important in the South African context given the persistently high levels of unemployment and frosty relations between labour and business which more often than not result in prolonged and disruptive industrial action.
Second, the book contributes to the socioeconomic debate and the understanding of South African labour markets by conducting empirical analysis, and offers policy recommendations on various aspects of labour markets and fiscal policy adjustments to shocks. Furthermore, recognizing that the global financial crisis demonstrated that price stability can mask huge and systemic financial risks, the empirical analysis conducted in the book takes this lesson on board.
Third, the book shows that price stability cannot be ignored and should anchor the policy discussion. Hence, the analysis conducted in the book is anchored on the adjustments to shocks within the price stability mandate of a 3â6 per cent inflation target range as well as financial stability. The reference point of the analysis in the book is the compatibility and consistency of the various shocks with the inflation target band of 3â6 per cent.
Fourth, the policy issues explored empirically in the book are of immediate socioeconomic and political concern and address the realities that are currently preoccupying academics, social activists, labour unions and policymakers alike. It is in this spirit that the findings and policy recommendations contained in the book may contribute to policy interventions addressing important internal dynamics and realities in the South African economy.
Fifth, the book engages with whether the structure of labour markets has a bearing on the impact of the introduction of the minimum wage. The price stability mandate has been absent in discussions of the impact of the national minimum wage. The empirical evidence in the book shows the various channels through which the effect of the minimum wage is transmitted to the real economy. Chapters throughout the book are dedicated to the exploration of transmission channels such as the profitability of firms, measured by gross operating surpluses, and economic growth in the transmission of the minimum wage shock into income inequality, as measured by the Gini coefficient.
Furthermore, theoretical economic models postulate that the implementation of a minimum wage can have substitution and scale effects. At the same time, the efficiency wage theory postulates that higher real wages can through various mechanisms, result in higher labour productivity. The book dedicates a number of chapters to exploring whether there is evidence that the dynamics of the capital-labour ratio are impacted by a positive shock to minimum wage growth and what role there is for price stability. The wage efficiency hypothesis is also formally tested in the book. We ask: Does labour productivity growth increase due to positive minimum wage shocks? If so, does price stability matter when appraising the shock effects of positive minimum wage growth on labour productivity?
Sixth, the effect of price stability on labour market dynamics has not been investigated. The Monetary Policy Committee (MPC) is mandated to pursue price stability within a flexible inflation targeting monetary policy framework. The MPC considers the output-gap , prospects for inflationary pressures, other real and financial economic developments and labour market conditions in deciding on the appropriate monetary policy settings. The current flexible inflation targeting framework is silent on the extent to which price stability plays a role in the GDPâ(un)employment growth nexus in South Africa. We dedicate a number of chapters in the book to seeking to establish whether a GDPâemployment growth nexus exists in South Africa and whether it differs when inflation exceeds the 6 per cent inflation threshold compared to when it is below this threshold.
1.2 Why Is Empirical Evidence Needed to Test the Extent to Which South African Labour Market Data Conforms to a priori Theoretical Expectations?
Existing labour market data has been criticised as largely anecdotal in nature. We argue that failure to use empirical analysis to test the validity of this criticism and assumptions to determine if it refutes a priori theoretical predictions is a major weakness of the current debate and work in this field.
1.3 There Is a Need to Fill the Gap that Relates Labour Market Features and Monetary Policy
This book argues that appropriate policy interventions aimed at labour markets need to distinguish between the âdiscouraged worker effectâ and the âadded worker effectâ. The empirical analysis contained in the ...