Which Labour Market Structure Model Predictions Are Consistent with the Effects of a Minimum Wage on Inflation in South Africa?

Abstract

Evidence in this chapter rejects the predictions of perfectly competitive labour markets in favour of the monopsony labour market structure predictions in response to an increase in the minimum wage. The consumer price inflation and changes in the Gini coefficient decline, whereas nominal wage, employment, GDP and gross operating surpluses growth increase in response to a positive shock to the minimum wage. Evidence in this chapter indicates that in contrast to the theoretical predictions of a perfectly competitive labour market, inflation declines significantly following a positive shock in the minimum wage. The cumulative consumer price inflation decline is much greater due to the amplification by increasing GDP growth. This shows that robust GDP growth has supply-side effects as it propagates the decline in consumer price inflation following a positive shock in the minimum wage. The finding of a decline in inflation and increase in GDP growth is consistent with the predictions of the monopsonistic labour market structure rather than a perfectly competitive market structure.