Impact of the Introduction of Sectoral Minimum Wages on Low Wage Markets in a Low Income Country: Evidence from South Africa”

We exploit the introduction of minimum wages in the agricultural and domestic work sectors of South Africa to study how the structure of low-wage labor markets of a low-income country changes with the changes in policy. Even after the introduction of the minimum wage, we find widespread and persistent non-compliance. Our (lowerbound) estimate of the national level compliance rate in the agricultural sector in 2003 is 29%, while that of the domestic work sector in 2003 is even lower at 17%. Further, the compliance rates by sub-population groups reveal that compliance rate is low where the cost to comply with the minimum wage law is high. This implies that government enforcements are not done in situations where they are likely to have the highest payoff due to the number of people involved and where there are incentives for noncompliance. However, it may be also true that the government intentionally allow high noncompliance in such areas as strict enforcement may have huge adverse impact on the most vulnerable people. Although we see increase in employment at the wage range above the minimum wage and in the adjacent sector without minimum wage, the net employment effect is negative. Further, the simultaneous changes in the intensive margins show a worker directly impacted by the introduction of minimum wage may experience decrease in important non-monetary compensation and working hours in exchange for the increase in wage, implying that only investigating monetary compensation (i.e. wage rate) may overestimate the benefits of the introduction of minimum wage. We also find evidence of a labor-labor substitution in both sectors and that the introduction of minimum wage prompts employers to hire more-skilled/nonpoor workforce, which adversely impacts the least-skilled/ the poor. Judging from the collected evidence, the policy may not be very effective in poverty reduction as claimed by the South African government and hopes that there may not necessarily be a decrease in total earnings.