Minimum Wage Enforcement in South Africa Measurement and Determinants

Abstract

The lack of compliance amongst employers with minimum wage legislation is a problem faced by many developing countries. South Africa is no exception, informal evidence suggesting that a large proportion of the employed in the country earn wages below the stipulated minima. This dissertation attempts to measure non-compliance or, in other words, 'violation' of employers in South Africa of minimum wage legislation, and to investigate the determinants of this violation. This study constitutes the first attempt to measure enforcement and compliance in South Africa. In order to measure the strength of government enforcement of minimum wages in South Africa, the number of labour inspectors is used as a proxy measure, while employer noncompliance, or violation, is measured using an approach developed by Kanbur (2007), referred to here as the 'Kanbur Index of Violation'. Derived from the Foster-Greer-Thorbecke (1984) poverty measures, this index is used to measure the share of violated workers receiving sub-minimum wages, as well as the depth of violation, namely, the average gap between the stipulated minima and the actual wage paid. This is the first attempt in the literature on minimum wage enforcement to use the methodology proposed by Kanbur (2007) for the measurement of violation. The estimates obtained for South Africa show that the sectors where violation is most prevalent include the Security, Taxi and Farming sectors. A multivariate analysis is employed, using standard OLS, probit, and quantile regression techniques to investigate the determinants of the probability of a worker being violated by their non-compliant employer, as well as of the depth and extent of the violation, that is, the shortfall of their wage from the minimum. Another innovation of this paper, in addition to the use of the Kanbur index as a measure of violation, is the introduction of a number of spatial/density variables, such as the log of workers per square kilometre, the density of labour inspectors in a District Council, and the unemployment density in the area. The construction of these variables was made possible by mapping the statutory minima, which are location specific, to the geographic units in the Labour Force Survey data for South Africa. The principal findings of this analysis are that violation is an outcome of a range of 8 variables, including individual, firm-level/contractual, sectoral, as well as spatial/density characteristics. A key marker of the probability of minimum wage violation and the depth of violation is the density of labour inspectors in the District Council where the worker is employed. Firm-specific characteristics such as firm size also play a leading role. The results from this dissertation carry important policy implications for minimum wage legislators in South Africa, especially regarding interventions around the enforcement of sectoral minima.