Would wage transparency work in SA?
In Scandinavian countries, citizens can look up what any other citizen earns in an online national database. Could South Africa use a version of income transparency? Economists, as usual, are divid…
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23 January 2020
It is common cause that South Africa is disfigured by the world’s most inequitable economy. But the detailed shape of that inequality is largely shrouded in secrecy. The wealth of South Africa’s elites extends far beyond their taxable incomes, but even formal salaries in the private sector are hidden from public view.
There is a small bracket of transparent data. At the bottom end, we know what the various minimum wages are (though we also know many employers still pay well below them). At the top end, we know what the bosses of listed corporations pocket, as their remuneration is usually disclosed by their companies in line with JSE regulations. We also know the salary bands for public servants such as teachers, nurses and police officers.
But everyone else’s paycheques are their own business. Even the South African Revenue Service is not privy to the real incomes of countless illicitly rich South Africans.
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So what’s the big deal? Income secrecy and tax evasion are universal fixtures of late capitalism. Well, not quite. There are some extremely prosperous exceptions. In Norway, Sweden and Finland, every taxpayer’s annual income and tax payments are transparent. If you want to know what your boss earns, you simply type his or her name into the search field of an online public database and voila, up come the numbers, down to the last krona.
Digital searchability is fairly new, but the Scandinavian tradition of income transparency dates back to the 18th century, when tax authorities would publish printed registers of citizens’ incomes.
But in 2001, Norway broke the mould by moving the national tax database online, triggering a national binge of snooping. At first you could search anonymously, but in an effort to discourage nosiness, the authorities changed the rules in 2012. You now have to log in before searching and the people you search for can see that you have done so. (As a result, the number of searches has plummeted. The prospect of embarrassment is a major deterrent to the average Norwegian.)
The cart and the horse
Should we do this in South Africa? There are convincing arguments for and against a version of income transparency. The strongest case against it is simply that there’s insufficient evidence it would improve the labour market, or the lot of underpaid workers, or the collective good. And we shouldn’t put the transparency cart before the equality horse, says Brian Monroe, a behaviour economist at the University of Cape Town’s Environmental Policy Research Unit.
“The Norwegian policy is longstanding and cultural in nature,” he says. “The reason Scandinavian countries have very little income inequality is not because they have made wages transparent for so long, it’s because they have high taxes and very generous welfare programmes, and they redistribute incomes,” he said.
“Personally, I would love to see this proposal passed, because we economists would have phenomenally rich data from which to draw all kinds of inferences. But given the way the South African labour market is structured, I doubt it would lead to greater earnings at the lower end of the income scale,” says Monroe.
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“The unemployment rate is pushing 30%, and low earners – often seasonal or casual workers – are not unaware of how much they can earn for the work that they do. There isn’t a tremendous amount of variation in these kinds of wages or a big information barrier.”
Monroe is sceptical about whether company bosses and other rich South Africans would be shamed into curbing their own pay or increasing their workers’ pay by the granular exposure of inequality. “There is not a lot of shame at the top end of the income bracket,” says Monroe. “Most people in that bracket are already pissed off that they pay lots of taxes.”
Tall-poppy syndrome
Shame and the lack thereof is the crux of the transparency debate. Economic researchers have shown that in most capitalist societies, our financial position in relation to those of others has a strong effect on our happiness or unhappiness. People generally enjoy the knowledge that they earn more than their peers, and are annoyed – and perhaps ashamed – by the knowledge that they earn less than their peers.
In Scandinavia, and particularly Norway, the pattern is a bit different because of the deep-rooted conformism and egalitarianism of the region’s culture. Both of those forces are driven at least in part by the perceived shamefulness of greed and individualism. Some historians suggest that Norwegian economic equality has its roots in the Black Death of the 14th century, because the plague wiped out most of the urban elites and largely spared the rural peasantry. The harshness of the winters and the puritanical slant of Lutheran Christianity have also surely contributed to the Nordic “tall poppy” syndrome.
The upshot is that most Scandinavians love the fact that most of them earn broadly similar incomes. For example, a nurse or a teacher or police officer earns fully 60% of the average lawyer’s income. In South Africa, the equivalent ratio would range between 10% and 20% – we can’t know for sure because the average lawyer in question is not telling us what they make.
We can be fairly confident, however, that said lawyer doesn’t think they’re overpaid. The unusually high proportion of luxury cars bought by rich or indebted South Africans points to a culture of flagrant celebration of individual accumulation. Plenty of rich people would savour the public documentation of their loot.
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Unsurprisingly, mainstream economists in South Africa don’t have much time for the idea of universal income transparency. Two left-leaning economists I spoke to both liked the idea in principle, but said that mandatory transparency in corporate wage structures was a more urgent and achievable project. That’s a policy already called for in a resolution of the Jobs Summit in 2018, though there’s little sign of any concrete moves to implement it.
“There are many reasons to introduce full income transparency, and very few reasons not to do it, except the massive resistance you will get, including from the people who would have to pass the laws,” says Neva Makgetla, a senior economist at Trade and Industrial Policy Strategies who has been an influential voice in labour policy debates during the democratic era.
“Public-sector pay is generally more or less open,” says Makgetla. “But the real problem is that the public-sector pay [for managers and senior officials] was modelled on the private sector. And then the private sector got even more extreme. So when these guys say, ‘Well, we could earn three or four times as much in the private sector,’ that’s probably true. And that’s exactly the problem. So my feeling is that transparency is good, but taxation is better. And just plain limits would be even better,” she says.
Unlike Monroe, Makgetla says that greater transparency, in combination with societal and state pressure on big companies, will compress wage gaps. “The argument is that as income becomes more transparent, different mechanisms kick in. It’s quite cheap to increase pay at the bottom, which reduces your ratios, as well as constraining pay at the top. So both things should kick in, ideally.”
Towards wage equality
At present, JSE-listed companies are required to report what they pay their executives, though many have gotten away with reporting just the total pool of executive pay instead of individual packages.
But for development economist Ayabonga Cawe, a leading proponent of stronger policies on income inequality, this obligation doesn’t achieve much. We need a standardised measure of wage ratios to track each company’s efforts to become fairer, he says.
“There is a lot of disclosure of executive pay, but in relation to what? It might simply be the CEO’s pay in relation to that of the lowest paid worker, while some are in favour of the Palma ratio [the income of the top 10% of earners divided by that of the lowest 40%]. It could also be the lowest 10% compared to the top 10%.”
Whatever measure is adopted, there would be data integrity challenges, says Cawe. For example, a large chunk of executive income is earned in share options, while labour broking obscures the true lowest earners at many companies.
Once the inequality ratios are known, says Cawe, reform can take place honestly, in the sunlight of transparency. “For example, if the top 10% of a company’s employees were earning an average of 47 times the income of the mean earner, then that company could self-regulate, much like in the sector charters, and set a target of reaching a ratio of 20.” This is still nothing like a Norwegian ratio, but better than 47.
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“Our view [at the Jobs Summit] was that some form of mandatory disclosure is needed, as well as mandatory targeting of more equitable ratios,” says Cawe. “You do need some form of recognition that our being the most unequal society in the world poses a risk to our future.”
South African executives have a habit of banking millions in “performance” bonuses that are triggered by factors beyond their control, such as oil price rises. When the trough of unearned loot is drained, you can funnel the money all the way down the wage ladder. But that’s not the only way to spend the excess. Cawe adds:
“There might be firms where there is already much greater wage compression, and then the options go beyond wage redistribution. You can also invest in things that are socially desirable, such as expansion of production and employment. A lot of factors would influence that, such as current demand conditions and the prospect of greater demand. But if that whole pot of money is filtering to the people at the top end of the distribution, who have a much lower propensity to consume it in the real economy – the kind of consumption that creates jobs – that has a massive impact on achieving the growth we need. There is an opportunity cost to that money.”
As always, you have to start somewhere. By systematically shaming profitable companies into fixing their internal inequalities, we might inch towards a South Africa in which every worker’s income is fair enough to be shameless about. In the meantime, let’s shame the tax dodgers, shall we?
