South Africa is one of the world’s most unequal nations. This income inequality is mostly the result of significant unemployment and large salary disparities.
To solve pay disparity in South Africa today, economists and policymakers often focus on worker characteristics such as education. Recently, however, there has been renewed interest in the ability of employers to set workers’ salaries.
In my research, I demonstrate that employer wage-setting accounts for more than a third of wage inequality in South Africa. In reality, for the majority of workers, specific employers account for around half of the variance in income.
Employers have the authority to set wages due to a combination of two factors. One is the significant variations in employer productivity. The absence of competition between employers for workers, which is likely related to high unemployment, is the second factor. South Africa is strongly affected by both variables.
My article demonstrates that South Africa’s world-leading wage inequality has as much to do with bosses’ actions as it does with workers’ education or experience.
JOB HOPPING
The paper faced the issue of isolating the portion of wages attributable to employers, as opposed to worker qualities such as education or experience.
One approach to do this is to examine how a worker’s salary varies when they switch employers. These compensation adjustments cannot be based on productivity or competence, as the same person is paid differently depending only on their place of employment.
Have you ever changed jobs and earned a raise despite performing nearly the same amount of work? This is known as an employer wage premium by economists. Using tax data from 2011 to 2016, I followed virtually all job movers in the formal sector of South Africa to estimate this premium for each employer.
In a competitive labor market in which employers lack wage-setting authority, workers should be paid identically regardless of where they work, and there should be no employer wage premium.
Figure 1 demonstrates that pay increases and decreases when switching jobs can be substantial. A worker who successfully transitions from a low-paying to a high-paying employer more than doubles their income (light red line). Conversely, a worker at a high-wage job may be forced to move to a low-wage firm and be paid significantly less (light blue line).
Figure 1: Wages of workers who transfer employers over time
These discrepancies between employers with low and high wages contribute to pay disparity. I estimate that employers are responsible for 36% of wage disparity in the formal sector.
Taking into account other drivers of inequality (such as the fact that some people have jobs while others do not), employer wage premiums account for around one-fifth of the total income inequality in South Africa today.
The boss is a major influence.
A significant portion of the discourse about inequality in South Africa focuses on access to high-quality education. This is crucial. My research reveals, however, that a substantial portion of disparity is also attributable to the specific employer one obtains.
In Figure 2, differences in individual employers (red) and worker characteristics (blue) account for the same proportion of the variance in total salaries for all workers except those with the highest pay (blue). As a result, a substantial portion of worker compensation has little to do with education.
Such disparities in salaries based on the employer can be found in numerous other nations. However, South Africa stands out for the extent to which employers contribute to inequality, at least in comparison to estimates for wealthier nations.
Figure 2: Components of income attributable to worker and employer characteristics, by income decile
Notes: Workers’ earnings are divided into deciles, with the average percentage attributable to employer wage premiums (red) and worker attributes (blue) separated (blue). Premiums are displayed relative to decile 5 salary earners.
WHY DO BOSSES INCREASE WAGE INEQUALITY SO MUCH?
The dominant economic models that explain differences in wages attributable to distinct employers emphasize the dispersion of employer productivity and monopsony power. Monopsony power exists when bosses employ workers with little competition from other bosses.
The amount of money you make for a company, or your revenue productivity, is contingent on a number of factors that are unique to that employer. For instance, they may have superior technology or a well-known brand. Employers with higher productivity tend to pay their employees more, and as a result, greater disparities in revenue production between employers result in greater wage inequality.
This variance in income productivity is greater in South Africa compared to estimates for richer nations, but comparable to other developing nations such as India and China.
WAGE INEQUALITY
However, this disparity in revenue productivity is only relevant to wage inequality if employers have monopoly power. Without monopoly power, employees would leave for the highest-paying employer. In fact, one way to quantify this influence is to determine the extent to which businesses may reduce salaries without people quitting.
My estimates indicate that South Africa has more monopsony power than other countries. Employers pay workers a lesser share of what is generated, hence adding to South Africa’s wage disparity. This also increases the likelihood of worker exploitation.
This significant employer monopoly power may be attributable to the high unemployment rate in South Africa. When unemployment is high, it is more difficult to find employment; hence, people are less likely to resign in reaction to a wage reduction. This has traditionally been defined in terms of Marx’s “labor reserve army.” Consequently, employers may link two of the country’s most damaging characteristics: inequality and unemployment.
IMPLICATIONS FOR POLICY
Complex are the policy suggestions to minimize employer monopoly power. Despite this, it should be obvious that the involvement of employers to South Africa’s inequality crisis merits consideration. Potentially substantial gains exist for earnings, employment, and even taxation.
My analysis underscores the necessity of focusing economic analysis on the power of employers over employees.
»Pay disparity in South Africa is considerable«