The impact of minimum wage increases on the South African economy in the Global Policy Model

This paper uses the United Nations Global Policy Model (GPM) to assess how increasing minimum wages might impact the South African economy by increasing the share of income going to workers (the ‘labour share’) – in contrast to the share that accrues to capital through profits and property income. We simulate the implementation of a national minimum wage through increasing labour compensation in a manner which sees real-wage growth ‘catching up’ to and then outstripping labour-productivity growth in the period 2015–2025; we refer to this as increasing ‘relative’ real wages. The results indicate that higher ‘relative’ real wage growth rebalances national income: the labour share increases since relative wages rise (by definition) and employment is roughly maintained (endogenous response). A rising labour share has in turn a positive effect overall on the South African economy in the model: consumption expenditure rises as national income shifts towards wage earners as a whole, who have a higher propensity to consume than profit earners. However, there are moderate or small negative effects as investment as a share of GDP falls marginally, as the profit rate falls (though the absolute level of investment is higher as GDP rises), employment declines marginally, and there is slight weakening of the current account.