Business / Business News

Riaz Gardee
4 minute read
23 Nov 2016
8:03 am

Minimum wage is always zero

Riaz Gardee

The objective and impact of minimum wage and the way forward.

The minimum wage report, released on November 20 by Deputy President Cyril Ramaphosa, proposed a national minimum wage (NMW) of R20 per hour or about R3 500 per month. Reactions to the report were mixed, ranging from satisfaction, disbelief and even anger. Some believed the rate was too high, others too low, with the Goldilocks amount remaining elusive.

Objective of minimum wage

Ramaphosa said, “The proposed NMW isn’t a living or decent wage, but an attempt to address inequality and the problems of the country’s working poor. This is an attempt in dealing with unemployment, wage poverty and inequality.” The result of such vague objectives is usually disappointment to all the stakeholders, resulting in an even greater discontent, as none of them achieve what they had in mind.

The debate then remains centred around what a decent living wage should be, but never reaches any consensus thereon. To make matters even more confusing poverty is not defined nor is ‘dealing with inequality’. As a result, no clear tangible objectives are set as an end goal, making it even more difficult to tackle the root causes of the socio-economic problems. Perhaps if this was done, those setting the objectives may be measured against these targets and held to account?

Impact of minimum wage

American professor Thomas Sowell said: “Unfortunately the real minimum wage is always zero regardless of the laws because people lose their jobs or fail to find jobs when they enter the labour force. Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount – and, if it is not, that worker is unlikely to be employed.”

It is one of the most basic principles of economics, that prices artificially raised above levels set by demand and supply create unsaleable surpluses, whether it is commodities or labour being sold, regardless of the presence of empathy. We have seen this in many instances, such as the artificially-set exchange rates in Nigeria and Zimbabwe which spectacular crashed, with dire consequences on the economy.

Unfortunately, it is often the poor who bear the brunt of these economic policies, which are intended to shield them. Implementing policies without a careful analysis of the cause and effect relationship often ends dismally for almost everyone.

In our modern globalised and interconnected world South Africa is competing with companies from around the world. The cost of water transport is significantly lower than land transport.

As an example, the additional transport cost of a pair of shoes delivered from Hong Kong to Johannesburg, over 10 000km away, is only a few rands more per pair than a factory based in Durban, less than 600 km away. Additional labour costs without incremental productivity will in all likelihood shift the production to those with cost advantages. The cost structure of each industry needs careful consideration as well as its ability to convert to mechanisation which, as an unintended consequence, may permanently remove those jobs from the economy.

Reducing the discussion only to the quantum of a minimum wage avoids the difficult questions. What is our target unemployment rate per year for the next ten years? What is an acceptable level of inequality, if any? Do we transfer wealth or create wealth? Can sharing of wealth be separated from producing wealth? What is a ‘fair’ share of wealth and is a demographic basis appropriate? What kind of a society are we working towards? Why has the National Development Plan (NDP) been ‘forgotten’?

A minimum wage on its own is unlikely to be the panacea and may even have unintended consequences of increasing unemployment. Not identifying and targeting the underlying causes will make a minimum wage as meaningful as a minimum weight requirement for all employees.

Way forward

Poverty ensues without effort, while wealth needs to be created. Productive minorities have been vilified throughout history, usually to the detriment of the entire economy, whether it has been the French Huguenots fleeing France, the Jews leaving Eastern Europe, the Indians expelled from Uganda or numerous other similar examples. Professor Sowell said “It is quite rational, from the standpoint of the self-interest of leaders of lagging groups, to keep the groups they lead resentful of more advanced groups, and to blame the advanced group for their own failures”. It would be a wise leader who would replace blame culture with a common focus on improving collective productivity.

South Africa has an unemployment rate approaching 30%, with high levels of inequality requiring long-term, sound decisions. However, government has to please many constituencies, all with urgent demands, including unions, rating agencies, the unemployed, potential voters, investors and industry. Demonstrating commitment to labour changes, while at the same time preventing crippling strikes, is a tight-rope walk. However, many of these critical issues accompanied by well-considered practical solutions have already been tabled in the now forgotten NDP document.

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