German evidence shows SA is making a mistake on minimum wage

07 September 2016
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THE proposed national minimum wage appears to be a fait accompli, with the actual amount being the only cause of disagreement between the parties at the National Economic Development and Labour Council (Nedlac).

To resolve the matter, Deputy President Cyril Ramaphosa has appointed a panel of seven people, mostly academics, to advise the government on the level at which to set the wage.

Researchers from Wits University’s national minimum wage research initiative are of the view that if wages are simply forced up, it will incur no (or only minimal) consequences, and, far from costing jobs, the national minimum wage will "pay for itself" by boosting demand in the economy.

In contrast, researchers at the University of Cape Town display a better grasp of reality and understand that legislating an increase in wages will obviously entail adverse consequences.

They foresee that employers will alter their behaviour by adopting several possible tactics, including: increasing prices, reducing employment, or reducing their demand for labour by slowly shifting to increased mechanisation.

The latest evidence to emerge that supports the view that raising wages artificially entails adverse consequences comes from Germany, where an hourly minimum wage was introduced in January 2015.

According to Germany’s state institute for employment research, "Germany’s minimum wage, introduced just last year, has cost the economy 60,000 jobs".

The institute notes that a fifth of the companies polled said the hourly minimum wage had affected their business "by forcing firms to hike the price of their goods to offset the rising labour costs. Other casualties included cut work hours and postponed investments. Sometimes protecting workers is the quickest way to arrest development."

The official statistics from the German government agency thus reveal what common sense and most economists have known for a long time — minimum wages do cost jobs and reduce employment prospects.

If you are the one faced with the prospect of unemployment, the so-called "debate" between the competing schools of thought is merely academic.

Taking a more holistic and principled view, should we rather not double down on the laws and regulations known to hamper job creation, liberate the economy from the shackles of an overbearing state and focus on creating the conditions known to lead to economic growth and increased employment opportunities?

SA has one of the highest and most enduring unemployment rates in the world. Statistics SA’s quarterly labour force survey reveals some alarming labour market trends. The unemployment rate increased from 25% (5.23-million) in the second quarter of 2015 to 26.6% (5.634-million) in the second quarter of 2016, a loss of more than 400,000 jobs according to the strict definition.

A more realistic representation of what is happening is the expanded definition of unemployment, which includes so-called discouraged work-seekers and demonstrates that more than 500,000 jobs were lost over the course of the year, and puts the unemployment rate at 36.4% (8.880-million unemployed people).

Of the unemployed, more than two-thirds (66.9%) have been out of a job for longer than a year and a staggering 66.3% are between the ages of 15 and 24 years.

If the low end of the labour market were allowed to function unhindered, young, unskilled people would not have such a desperate struggle to get onto the first rung of the employment ladder.

A potential solution to SA’s chronic unemployment problem would be to exempt unemployed people from restrictive labour laws by giving them the freedom to negotiate and enter into employment contracts with anyone they choose, on any conditions and at any wage they find acceptable.

Inequality and poverty persist in SA, not because those who have employment earn too little or because some people earn too much, but because SA has nearly 9-million unemployed people. You do not need to be an expert in economics to detect that something is seriously wrong with the typical explanations provided of how the introduction of a national minimum wage will miraculously solve South Africa’s poverty, inequality and unemployment problems. Wage hikes that follow productivity increases should be welcomed by all, but those that are increased by political diktat should be rejected.

An additional layer of regulation will only serve to worsen the country’s unemployment problem. As the vast majority of the unemployed are young, black people, a legislated national minimum wage will have a disparately negative effect on the employment prospects of these people.

The debate surrounding the number of casualties that the proposed national minimum wage will toll is a cruel experiment to play on SA’s poor and vulnerable, particularly those who have been unemployed and have no idea why and for far too long. The debate also misdiagnoses the severe underlying problems of the desperate labour and skills shortages in this country. If the government is truly concerned about the poor, it will adopt policies that create higher levels of economic growth.

The most principled case against a national minimum wage is that it is morally wrong. Even one person made unemployable is sufficient reason to oppose such a policy. No matter how well-intended, a national minimum wage will harm the very people it pretends to assist and exacerbate poverty and inequality in this country.

• Urbach is an economist with the Free Market Foundation



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