WP 00/041 - Are Wage Adjustments an Effective Mechanism for Poverty Alleviation? Some Simulations for Domestic and Farm Workers

Haroon Bhorat

Date of Publication: 
September 2000

This paper utilises a basic simulation exercise to analyse the possible poverty and employment reducing effects, of instituting a minimum wage in the South African labour market. The simulation is undertaken for three groups of unskilled workers, namely domestic workers, farm workers and drivers. The results showed firstly that a wage policy pursued to reduce indigence amongst the target occupations will have a relatively small impact on poverty levels. It took very large, and in policy terms highly unlikely, wage adjustments to ensure a tangible poverty reduction impact. Secondly, it was evident that the results displayed the fact that most poor domestics and farm labourers were in fact quite far below the poverty line rather than earning just below R650 per month. Thirdly the employment-wage results show that a minimum wage policy would run the serious risk of significant short-run employment losses to accompany the poverty-reducing outcomes. 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 a minimum wage policy was considered in order to reduce poverty levels amongst these workers, it would not serve the purpose of significant poverty alleviation amongst its target population.

Download Working Paper: DPRU WP 00/041