Labour market policy and poverty: Exploring the macro-micro linkages of minimum wages and wage subsidies

Type Thesis or Dissertation - doctor of Philosophy
Title Labour market policy and poverty: Exploring the macro-micro linkages of minimum wages and wage subsidies
Publication (Day/Month/Year) 2009
As a middle-income country, South Africaâs high poverty rate remains a serious concern and has been at the centre of policy debates for over a decade now. Since poverty is inextricably linked to the labour market, labour market policies often top the list of proposed interventions. While several types of labour market policies are arguably appropriate, this analysis is particularly concerned with two âwage-basedâ labour market policy options, namely minimum wages and wage subsidies. The poverty-reducing potential of these policy options are unclear, and depend on a wide range of factors including, but not limited to, the wage elasticity of labour demand, the targeting of the policy, and the way in which wage or employment gains and losses are distributed among individuals and households under each of these policies. The complexity of the issue warrants the use of a suite of ex ante models that capture economy-wide direct and indirect effects as well as the micro-level poverty and distributional effects in a satisfactory manner. In this study, general equilibrium, microincidence and micro-simulation models for South Africa are developed and linked in a consistent, sequential manner to form a comprehensive macro-micro modelling framework that allows for such detailed explorations. This study adds value to the South African literature on labour market policy evaluation and their poverty impacts in general, and minimum wages and wage subsidies in particular, both in terms of the theoretical and descriptive analyses provided. Various possible modelling approaches are explored, with careful consideration of the advantages and limitations of each. A rich set of model results is also generated. Under both the policies evaluated, the poverty outcome is shown to generally be positive but small. Furthermore, the outcome is highly sensitive to the \n wage elasticity of demand: while minimum wages tend to be more effective in reducing poverty when the wage elasticity is low, wage subsidies generate superior outcomes under a high wage elasticity scenario. However, there are at least three other factors to consider as well. Firstly, both policies have important implications for consumer prices and household incomes, which from a welfare perspective cannot be ignored. Secondly, assumptions about how gains and losses are distributed in the micro-modelling frameworks greatly influence results. Thirdly, various external factors, such as âefficiency wage effectsâ under a minimum wage policy or alternative financing options for a wage subsidy programme, are important considerations. The policy analyses provided in this study contribute to the debates around these and other policy questions, and ultimately facilitate the process of designing appropriate policies. \n

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