Employment conditions commission

Chapter Four

4. 
   EVALUATION IN TERMS OF ECC CRITERIA
   

1. 
   Ability of employers to carry on their business successfully
   

The main purpose of the analysis conducted in the BFAP research was to provide information that is useful to those role players in deciding on what to do next. In this regard, the results are sombre. While the situation of permanent farm workers is not cause for immediate concern, especially on the intensive fruit farms that were analysed, the reality is different when it comes to seasonal workers. Permanent workers seem to earn more than the current minimum wage on these farms, and on potato and the mixed wheat/sheep farm that was analysed. The position of seasonal workers seems to be different, however, and even on the fruit farms they earn at most around R84 per day compared to the minimum wage of just less than R70 per day. Recall, however, that these are wages as paid on a ‘typical’ farm, and are not recorded wages. Nevertheless, where recorded wages are available the results seem to support this contention.
So there is some scope to increase the minimum wage. From the analysis, however, it is evident that if average wages increase by more than R20 per day (i.e. to around R104.00 per day), many farms will be unable to cover their operating expenses, and hence not be able to pay back borrowings or to afford entrepreneurs remuneration. On the other hand, however, even at what seems to be an unaffordable minimum wage of R150.00 per day most households cannot provide the nutrition that is needed to make them food secure.
It is also evident from the BFAP analysis that the fact that a negative net farm income (NFI) is generated under scenarios where wages rise by more than R20 per day from the base case scenario does not imply that there will be no farming in South Africa in years to come. What it does mean is that structural adjustments will be made to accommodate the higher wage rates. These structural adjustments include mechanization and consolidation of farming units to become more efficient. For example, in the case of potatoes, the BFAP model shows that a potato farm needs to be at least 150ha in size to achieve a positive NFI under a R150/day wage scenario and then principal payments; income taxes and family living cost still need to be deducted from the net farm income. Thus a typical potato farm that is smaller than 150ha will not be financially sustainable. This does not imply that the larger farms are always more cost efficient, but the larger farming units have the ability to mechanize and as wages rise, mechanization becomes more attractive.
On-farm mechanisation will in most cases result in the shedding of seasonal labour. It was calculated that approximately R3.7 billion is annually spend on seasonal agricultural labour wages. If 50% of these workers are taken from the system, the economy would lose R1.8 billion annually. But if agriculture were to intensify and expand under a favourable economic and political environment, it could result in increased efficiency and productivity due to mechanisation. The seasonal labourers could be placed in the permanent labour position, increasing the remuneration bill, which will have vast positive spill off effects in rural communities – more entrepreneurs due to more buying power from the local communities, stimulating the entrepreneurial economy. There would be more emphasis on the workers’ value to the farm, rather than just the idea of wages. The reverse of this is also true, that under correct conditions, agriculture can adjust, grow, increase employment and pay better wages.

2. Creation and the retention of employment

BFAP in its report indicated that it is difficult to estimate how much labour will be shed throughout the industry if minimum wages are increased, since there are a number of factors that have to be taken into consideration that could not be covered in this study due to time and budget constraints. One important factor raised to be considered, is the mechanization threshold for each industry that many of the role players have already calculated and considered as an option. The study highlighted some cases of the costs of mechanization. Yet, not all industries can mechanize and therefore one can anticipate that for highly labour intensive industries that cannot mechanize, the structural adjustments will be greater and the loss in job opportunities will be significantly higher.

In addition, BFAP argued that if wages are increased by either R30 or more from the baseline, the demand for unskilled agricultural labour will decrease notably (decline of between 7.8% and 10.5% depending on the province), whereas the demand for capital, land and skilled labour remain constant because of the assumption of full employment. Demand for unskilled non-agricultural labour will slightly decrease because of the general dampening of the economy (decline of between 0% and 0.05%).

They further indicated that because of the minimum wage increase, the income of all unskilled agricultural labour increase (by 18.9%), whereas incomes of skilled agricultural labour generally decrease (changes between 1.0% and -3.2% depending on the province). The wage rates of non-agricultural skilled labour also decrease negligibly because of the general dampening of the economy (between 0.05% and 0.08%).
BFAP also indicated that there is a general contraction of the agricultural industries and that it is reflected by the decrease of production of all agricultural products (between 0.1% and 1.4% depending on the product) and the general decrease in output of agricultural industries (changes between 0.4% and -3.3% depending on the industry).

They also in their report indicated that there is a decrease in exports of all agricultural and food products (between 0.8% and 2.8% depending on the product) and an increase in imports of all agricultural and food products (between 0.2% and 1.5%). There is therefore a negative impact on the trade balance.

3. The cost of living

According to BFAP, at a wage of R105.00 per day, overall household incomes of poor households increase (between -0.04% and +2.63% depending on the household), whereas household incomes of rich households decrease (between -0.44% and +0.1%). Household expenditures follow a similar pattern if wages are increased by the baseline to more than R104.00
They also indicated that welfare estimates for poor agricultural households increase (between 0 and 0.04), but it decreases for all other households (between 0 and 0.17), including poor non-agricultural households (between 0 and 0.03) because they now face higher food prices without wage increases.
When the substitutability between different factors such as different labour groups and between labour and capital is increased modestly, the decrease in demand for unskilled agricultural labour could be as high as 28%. It is recognised that not all industry can be mechanised to the same extent or substitute unskilled labour for skilled labour, so the real decrease in demand for unskilled agricultural labour when the minimum wage increases by R20 could be between 10% and 28%. Agricultural and food price increases are also larger if there is a greater level of mechanisation or switch to skilled labour.
What BFAP find to be an interesting result is that all households (poor and rich, agricultural and non-agriculture) experience a decrease in household income. Returns to land still increases slightly, but incomes for capital and all labour groups decrease. Welfare estimates also confirm that all households are worse off if the minimum wage increases in the presence of greater substitutability between different factors of production.

4. Food Security Modelling¹¹

The concept of the ’basic food basket’ ¹²(used in the quarterly NAMC Food Price Monitor) was explained above, as a selection of food items representing the dominant food items purchased by middle income to poor consumers which includes items within all the major food groups. It should be noted that this ‘basket’ of food groceries was not compiled based on nutritional quantity and quality considerations, but rather to serve as an index value to monitor food prices of a variety of food items over time. In October 2012 the cost of the ‘basic food basket’ amounted to R485.90.

According to the results of the study most of the income earners can afford at least one ‘basic food basket’, with the following range of results:

• 
  A poor household with an income level of R1 200 per month (i.e. food expenditure of R499) can afford roughly one ‘basic food basket’;
  
• 
  On the upper end of the spectrum a household with an income level of R6 860 per month (i.e. food expenditure of R2 854) can afford roughly six ‘basic food baskets’ per month;
  
• 
  A household with a monthly income level of R2 015 (i.e. the average monthly household income of the poorest 50% of rural Western Cape households according to the General Household Survey 2011) can afford 1.7 ‘basic food baskets’ per month.
  

Furthermore, BFAP argued that in order to develop an understanding of poorer consumers’ inflation experience and impacts the ‘basic food basket’ index weighted ‘5 most commonly consumed food items’ index were included in their study.

In their report they indicated that in order to analyse food affordability from the point of view of low income consumers in the Western Cape it was necessary to construct a number of potential household income scenarios. The scenarios were based on different potential income sources (e.g. child grants, old age pension and wages) and different potential daily wage levels.
According to Statistics South Africa’s official Consumer Price Index (CPI) 2008 weights for the total country (StatsSA, 2008) the poorest 20% of consumers in South Africa (called the ‘very low expenditure group’ with annual expenditure of up to R14 564 or R1 214 per month in 2005/2006) spent around 41.61% of their total expenditure on food and non-alcoholic beverages. Thus, is this section the assumption was made that the target consumer group spends 41.61% of their total income on food and non-alcoholic beverages.
As a low income household in the Western Cape were used in the study as the basis for calculations and assumed to consist of 2 adults and 2 children, the calculations indicated that:

• 
  44% of rural Western Cape households have 4 or 5 members (average household size of 4.7);
  
• 
  61% of rural Western Cape households have 2 adults (average number of adults 1.7);
  

• 
  67% of rural Western Cape households have 2 or 3 children younger than 18 (average number of children 2.3).
  

Regarding the food affordability for low income consumers in the Western Cape, BFAP discovered that poor persons’ food index’ is based on a particular daily food plate, representing poor South African consumers’ typical daily portion sizes of the five most widely consumed food items in South Africa: maize porridge (532g cooked portion), brown bread (150g portion), sugar (22g portion), tea (2.5g portion) and full cream milk (56g portion) (the typical portion sizes were obtained from reputable scientific sources as explained above). The cost of a ‘typical daily food plate’ for the poor is calculated by combining official StatsSA food price data with the actual portion size weights obtained from literature.

In October 2012 the cost of the daily food plate of the BFAP Poor persons’ Index amounted to:

• 
  R4.26 per person per day; or
  
• 
  R127.80 per person per month; or
  
• 
  R460.08 per household of 2 adults and 2 children per month.
  

As evident from the report, most of the income scenarios can afford a food expenditure level of R460 per month. However, the problem is that this food plate only provides around 2500kJ of energy (thus only around 40% of recommended energy intake) and furthermore it is extremely inadequate in terms of nutrient diversity. A household with a monthly income level of R2 015 (i.e. the average monthly household income of the poorest 50% of rural Western Cape households according to the General Household Survey 2011) could have only R378 per month available for further food expenditure after purchasing this food plate, in order to increase their energy intake and / or improve the dietary diversity of the people in the household.

5. Poverty alleviation

The ECC is of the view that the minimum wage level agreed on, although it will not eradicate poverty, is a big step forward in dealing with poverty alleviation. Poverty alleviation will only be defeated when all stakeholders address this issue in a coherent manner. Nevertheless the level will set a higher base from where future levels will be based and assist in reaching our goal.

6. Operation of SMMEs and new enterprises

In deciding on the new minimum wage level for the sector the ECC considered the effect of the level on emerging farmers. The ECC reiterated its decision in the previous report, on the impact that the new minimum wage level will have on SMME’s. The ECC is confident that the proposed new minimum wage level will not have a significant negative impact on SMME’s since those who employ less than five employees are exempted from paying the minimum wage.

Chapter Five

Recommendations of the Employment Conditions Commission

Minimum wages

With regard to the level of the new minimum wage, the majority of the Commissioners supported the recommendation of the Department that the new wage be pegged at R105 per day as from 1 March 2013. Although Commissioners supported the recommendation, they felt that the policy dilemma was well captured in the BFAP report. Even at a much higher wage of R150, large numbers of farm workers households would not have a sufficient income to meet their basic need. However, as highlighted in the BFAP report, at a wage above R105, it is likely that there will be a significant negative impact on employment. The Labour Commissioner argued strongly that R105 takes farm workers nowhere near a decent living wage, and that this remains unacceptable. Furthermore, Commissioners agreed that prior to the next review process of the determination, a similar study conducted by BFAP has to be undertaken to provide an indication of impact of the new wage in the farm worker sector so as to better inform the review process.

Business’ representative in the Commission did not agree with the R105 as the new level of the minimum wage. Instead the Commissioner was of the view that the new wage be pegged at R94.90. He indicated that the average base wage of R84.90 per day as per the BFAP report be utilized plus an additional R10. This would be a minimum wage, with the parties able to negotiate collectively for higher wages appropriate. He felt that the proposed level was appropriate as a minimum wage, given the reality that it would be much higher than the previously determined minimum of R75.35 per day, which would have taken effect from 1 March 2013. The commissioner was also concerned about the message being sent to parties in this sector and in other sectors about the need and reasons for reviewing sectoral determinations. Specifically, the commissioner acknowledges the right to strike by employees in order to improve their conditions, but counselled against rewarding such behaviour by increasing minimum wages in the sectoral determination.
Forestry wages

The ECC was concerned that since the SD for the forestry sector set minimum wage linked directly to the level of the farm worker wage, increasing the wage for farm workers will have a direct impact on the forestry industries. This link arose because the SD for Forestry brings the forestry workers’ wages in line with the farm worker’s wages; nevertheless the commission felt that it is important that the link between forestry and farm worker sector should be maintained.

The business representative argued very strong that consideration has to be made on the possible impact which mixed farmers could be faced with if farm worker’ wages are substantially increased.
Recommendation for a NEDLAC full review of the agricultural sector

Some of the Commissioners felt that it was important to address the long term structural issues in the agriculture sector, which was both declining rapidly and based on a low-wage model. The majority of ECC believed the government, labour and employers, and other interested parties needed a social pact of some form to address the growth, wage and employment issues in the sector. Without this, workers will continue to earn wages below the poverty line and the sector will employ fewer and fewer workers. The ECC, majority proposed that NEDLAC be charged with the responsibility dealing with the long term issues relating to the transformation of the agricultural sector. NEDLAC should set up an urgent review of the sector with a view to developing an Agricultural Charter (or similar) which addresses the long term sustainability and growth of the sector. The review should address inter alia, job creation and retention, agricultural trade and tariff issues including dumping, social conditions on farms etc. The review could be conducted as part of the Decent Work Country Programme. They also recommended that the report done by the BFAP be forwarded also to NEDLAC.

Duration of the sectoral determination

The majority of the Commissioners recommend that wages be determined for a period of three years, until February 2016. In terms of determining the wage increases for the two subsequent years, the ECC recommends that wages be increased by CPI (quintile 1 as published by Stats’SA six weeks prior to the increase date) plus 1.5 %.

The labour representative did not agree that the determination should be for three years. Labour argued it should be a one year interim determination, with all conditions being reviewed in the course of 2013, in parallel with the proposed NEDLAC review. The majority of ECC felt that a 3-year determination would both provide certainty about labour costs in the industry and provide the parties with a sufficiently long period to address the structural transformation of the sector.
The business representative did not agree to the CPI plus 1,5% for years 2 and 3 of the sectoral determination. Instead, he proposed that wages be increased by the headline CPI. The Commissioner argued that if the Minister approves the recommendation of R105 as recommended by the majority members, utilizing CPI, (quintile 1) plus additional

1.5 % would have serious negative impact on the agricultural sector, especially in light of the fact that this huge increase was far exceeds the budgeted increase that would have taken effect on 1 March 2013.

The following table summarizes the ECC’s recommendations:

Table 1:Minimum wages for employees in the farm worker sector
Minimum rate for the period				Minimum rate for the period			Minimum rate for the period
1 March 2013 to 28 February 2014				1 March 2014 to 28 February 2015			1 March 2015 to 28 February 2016
Monthly	Weekly	Daily	Hourly	Monthly	Weekly	Hourly	Monthly	Weekly	Hourly
R2274.82	R525.00	R105.00*	R11.66	Previous year’s minimum wage + CPI** + 1.5%			Previous year’s minimum wage + CPI* + 1.5%
* For an employee who works 9 hours per day ** The CPI to be utilized is the available CPI for the lowest quintile as released by Statistics South Africa six weeks prior to the increment date.

1^ Council for Conciliation Mediation and Arbitration

2^ Agriculture South Africa

3^ Congress Of South African Trade Unions

4^ African Farmers Association of South Africa

5^ Landou Werkgewers Organisasie

6^ Congress of South African Trade Union

7^ Transvaal Agricultural Union of South Africa

8^ Source: BFAP report

9^ Source: BFAP report

10^ Source: Department of Forestry and Fisheries

11^ BFAP report

12^ As calculated by Statistics South Africa