Minimum wage: a burden or lifeline for the economy?

It’s clear from the recent refocus on a national minimum wage that the cases for and against it are far from settled. Last week the National Assembly passed the National Minimum Wage bill, a step towards making it a reality.

New debates on the subject arose, with economists cautioning that raising wages will in the long run lead to job losses. They remind us of a basic principle of economics; that the demand for labour falls when wages rise. They, together with other minimum-wage opponents, assert that any rise in wages, any implementation of basic wage increases across sectors on a national scale, carries a far greater risk to the economy than anything else.

But is the risk greater than that posed by unemployed youth who are frustrated and have nothing to lose? Can it really be a greater risk than rising inequality and pervasive poverty? I think not. We must guard against those wishing to influence the slicing of the economic pie when they are more concerned about keeping a bigger piece for themselves than whether everyone is getting a slice.

Even against growing evidence that a national minimum wage does not cost jobs, many continue to fall back on this argument. The realities of our country’s labour market are at best complex and dynamic and must never be reduced to linear or single-issue level, lest our attempts to solve them become trapped by such parameters.

At the same time, those supporting the national minimum wage must be careful not to be seduced into thinking it will solve poverty and lead to miraculous economic growth. This is where our political leadership and those advising it on labour-related policy must be alert; when your country has fewer prime people in the labour force and you have no way of ensuring they get in, a minimum wage is not necessarily going to solve that particular problem.

It is important to bear in mind how even the smallest upswing in wages, coupled to a clear state policy on unemployment, can translate into significant gains in buying power for those confined to a low income. If this is sustained for a couple of years, there’s a likelihood of it positively affecting the economy – provided that the economy creates jobs.

Those who may not care about national matters should remember that, in an economy burdened by a shrinking labour force participation rate and low wages that are unable to meet the basic needs of those who earn them, there is reason to worry. Although a minimum wage may not solve unemployment or create millions of jobs, it may just reduce the number of the ‘working poor’ who account for a substantial number of those who don’t have food and are living in poverty. Did the great economist John Maynard Keynes not point this out? Wages enable people to pay for their basic services as well as their shopping. Wages may be a cost to business, but they are an initiator of demand. Currently the economy could use the demand that is spurred by consumption free of debt accumulation.

The distribution of income has always had an antagonistic effect on broader societal inequalities. On the one hand those who earn the lowest are automatically condemned to a life of borrowing and accumulated debt that is cyclical, generational and impossible to break; on the other, households of higher income are more likely to consider precautionary savings in preparation for tougher economic times.

While a national minimum wage won’t automatically reduce South Africa’s unemployment, addressing the problem of income inequality must be at the forefront of microeconomic policy coordination between government and business. It is worth reminding ourselves that long-standing inequality imbalances in our society are unsustainable, and what is perceived as good in the short term (rejecting a minimum wage) might be at odds with what is good in the long run (an increase in wage share that incentivises demand).

Different kinds of inequalities block many South Africans’ vision of the future. Income inequality is one of the big irritants in our eyes. Those advocating for a national minimum wage say it is. I say that, while increasing the wage share through a minimum wage and simultaneously having policies that stimulate demand won’t solve the unemployment and economic growth problem, it’s a start.

And we have to start somewhere. Right?

Author – Mamokgethi Molopyane 

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