Economic Behaviour 101: Human Behaviour Can Be Contrarian (A Lesson From Domestic Workers’ Wages)
Recent research into people’s response to government raising the minimum wage for domestic employees highlighted some counter-intuitive responses. The economy benefited as there was no impact on employment and domestic employees’ incomes rose sharply. This gives much food for thought whether other similar initiatives in the informal sector could stimulate jobs and economic growth.
Conventional wisdom gets it wrong
In 2002, a minimum wage for domestic servants was set at R4.10 per hour. The average hourly wage at that stage was R3.67. At the same time the Department of Labour mandated that domestic workers needed to be registered with the Unemployment Insurance Fund (UIF). It was also announced that inspectors from the Department of Labour would conduct inspections to enforce the law.
Conventional wisdom at the time was that this would backfire as households would reduce their domestic labour requirements and there would thus be an overall loss of incomes and jobs to the domestic worker market.
In fact, the opposite occurred as average wages rose to R4.37 with no reduction in hours worked by domestic labour. In total their incomes rose by 20%. The number of workers registered for UIF also increased substantially whilst retirement funding (not required by these laws) tripled. So, in total, domestic workers were made considerably better off by these measures.
The other interesting fact is that inspections by the Department of Labour were almost non-existent and little or no coercion was applied to enforce the laws.
Researchers double-checked these figures and commissioned more research to see if there were any other extraneous factors that could have contributed to the situation. They found there was only one significant factor and that was that households followed the law. It was a pity they did not research the extent to which the absence of meaningful inspections contributed to the law being followed – in other words would heavy handed inspections have so annoyed households that they reduced their exposure to domestic labour?
Over to you
So it seems that a sensible proposal by the authorities will yield positive results if it appeals to citizens’ better instincts without being forced upon them. Maybe you can think of a good idea in the informal sector and propose it to government?
Conventional wisdom gets it wrong
In 2002, a minimum wage for domestic servants was set at R4.10 per hour. The average hourly wage at that stage was R3.67. At the same time the Department of Labour mandated that domestic workers needed to be registered with the Unemployment Insurance Fund (UIF). It was also announced that inspectors from the Department of Labour would conduct inspections to enforce the law.
Conventional wisdom at the time was that this would backfire as households would reduce their domestic labour requirements and there would thus be an overall loss of incomes and jobs to the domestic worker market.
In fact, the opposite occurred as average wages rose to R4.37 with no reduction in hours worked by domestic labour. In total their incomes rose by 20%. The number of workers registered for UIF also increased substantially whilst retirement funding (not required by these laws) tripled. So, in total, domestic workers were made considerably better off by these measures.
The other interesting fact is that inspections by the Department of Labour were almost non-existent and little or no coercion was applied to enforce the laws.
Researchers double-checked these figures and commissioned more research to see if there were any other extraneous factors that could have contributed to the situation. They found there was only one significant factor and that was that households followed the law. It was a pity they did not research the extent to which the absence of meaningful inspections contributed to the law being followed – in other words would heavy handed inspections have so annoyed households that they reduced their exposure to domestic labour?
Over to you
So it seems that a sensible proposal by the authorities will yield positive results if it appeals to citizens’ better instincts without being forced upon them. Maybe you can think of a good idea in the informal sector and propose it to government?
Provided by May and Company
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