The National Minimum Wage – a toxic, destructive instrument

12 December 2018
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The National Minimum Wage (NMW), signed into law by President Cyril Ramaphosa on 23 November, is set to harm a great many unfortunate people who currently earn incomes well below the NMW, and the many more who earn zero. The 9.74 million who were unemployed at 30 September 2018, some of whom lost their jobs in anticipation of the introduction of the NMW,  will have even greater difficulty in finding jobs.

Workers who earn slightly less than the NMW, requiring only a small upward adjustment to meet the R3,500 minimum, are likely to retain their jobs. The 2.5 million workers who earn more than R2,500 but less than R3,500 are vulnerable and at risk. Those earning considerably less, such as the 4 million people who are reported to be earning less than R2,500 per month, are in great danger of losing their jobs.

Professor Imraan Valodia, who chaired the committee that determined the NMW levels, defends the NMW and maintains that it will not lead to significant job losses. What number of jobs lost would be “significant”? To those who lose theirs, one job is sufficiently “significant” to justify saying “NO” to the NMW! He claims that the large increase in low paid work has “done nothing to address the unemployment challenge” but has, “instead, generated vulnerability and insecurity among low paid workers”. His committee obviously did not conclude that setting an NMW of R3,500 would make the “vulnerable and insecure” people earning R1,500 per month, not only less vulnerable and insecure but unemployed.

He also says, “Much thought has been given to an efficient and effective exemption process so that firms, including small firms that genuinely cannot afford to pay these wages will be given an exemption for a set period.” Is it possible that as someone who played a major role in the establishment of the NMW, Valodia is unaware that the Department of Labour has published regulations in which the “exemption” he speaks about has been cut down to a 10% discount for a maximum of 12 months? A parliamentarian whom I approached about the so-called “exemption” knew nothing about the draft NMW regulations that the DOL had published, which not only countermands the wording of the Act but is set to deal a horrendous blow to low-income employers and their low-wage workers.

Should low-income workers earn higher wages? Absolutely! The problem is that higher wages cannot be brought about by force or out of thin air. Employers need to increase their sales and profits to afford higher wages. This legislation essentially says, “we don’t care if you can’t afford to pay more – just pay or else we will come after you!” Thousands of small employers will quietly and sadly say goodbye to their workers, and some of them will have to close their businesses. What will this achieve? Does the DOL put the losers on one side of the scale and the gainers on the other and say, “see the scale balances, we have done a good job!” Or do they quietly say, “We had good intentions!” and then when they can’t sleep at night, “What have we done?”

The real route to higher wages requires strategic thinking, such as the “positive non-intervention” policy applied in Hong Kong in 1945 at the end of World War II. More than a million Chinese residents who had been deported during the war, flooded back to Hong Kong at a rate of about 100,000 per month between 1945 and 1947, taking the population to its former level of about 1.8 million. Nearly half a million immigrants surged in from China during the 1948/9 Chinese civil war. And, in the late 1970s, about 65,000 refugees from Vietnam landed in Hong Kong under the British entry rules for refugees. This large influx caused mass unemployment as well as other problems.

Hong Kong made a deliberate effort to remove government heavy-handedness from economic life, allowing entrepreneurs to innovate and employ the available labour in any way they could, with no strict labour laws and no minimum wage. Hong Kong resolved an unemployment problem like the one that now faces South Africa. With wise policies they grew the economy at an astonishing rate. Per capita income increased from 28% of that of Britain in 1960 to 137% in 40 years. South Africa should follow the practical and successful Hong Kong example and not the impractical and economically disastrous “forced minimum wage” route.

Eustace Davie is a Director at the Free Market Foundation and the author of Jobs for the Jobless: Special Exemption Certificates for the Unemployed and Unchain the Child: Abolish Compulsory Schooling Laws. He authored several chapters in the FMF’s books Nationalisation and Jobs Jobs Jobs. Eustace also authors many of the Foundation’s weekly feature articles and is regularly published in local and international media on labour, money, health care and economic issues.

This article was first published in City Press on 7 December 2018

 

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