Minimum Wage: A crime against the poor

29 May 2019
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The National Minimum Wage (NMW) is a crime against the poor of this country as it absolutely forbids them from accepting any compensation below the floor set by government. It is reasonable, therefore, to assume that some people who could be working are not employed because of the minimum wage.

That is one way to look at it. The other is that it artificially forces up the price of labour and thus reduces the demand for labour. This law of economics has nothing to do with power dynamics, gender discrimination, racism or concerns about equality. Those issues, as far as I can tell, exist in the minds of certain academics working for institutions such as Wits.

The law of supply and demand, as well as that of prices, is foundational to economics as we know it. It is respected because it expresses a commonsense notion that is self-evidently true to anyone who has experience of the real world. When you recognise that the cost of acquiring something desirable exceeds your perceived enjoyment/utility, you simply choose not to acquire it.

First do no harm
It is amazing that anyone could think it a good thing to raise the cost of labour through legislation when we have an official unemployment rate of 27.6%, or 38% if you include those who have given up looking for work. If you are desperate to sell anything (in this case your labour), the last thing you would do is raise its price.

In implementing the minimum wage, the key piece of “evidence” government seems to have relied on are the results of a non-standard model. What I mean by this is that they first rejected the use of computable general equilibrium models used by the likes of UCT and National Treasury because they gave what government considered to be the wrong answer. The wrong answer in this case was the prediction by these respected models that unemployment would increase if the minimum wage was raised.

Not only is this a clear case of experimental bias (empirical evidence should dictate these choices, not the fact that the researcher doesn’t like an outcome) but the chosen model (dimsimm) will have its own built-in assumptions. For the sake of our poor, unemployed people, I hope those assumptions are reflective of reality.

It is perhaps a reflection of officialdom’s supreme neglect of poor people that they are given a terrible education to depress their value as employees and then when they are ready to work, the cost of their labour is raised to above that value. In essence, government legislates for unemployment. It is not just the minimum wage, but every single piece of labour regulation that makes it more costly to hire a worker.

It is not a coincidence that we have such a high rate of unemployment. There’s nothing special about South Africa except that we are an emerging market with labour regulations copied from countries with hundreds of years of development and capital formation behind them. Incidentally, capital formation is the best way of raising wages without causing unemployment, but you need government to get out of the way.

Low pay, high unemployment
Professor Valodia, Dean of the Faculty of Commerce, Law and Management at Wits, along with David Francis argued that if the minimum wage causes high unemployment, then we should have seen a growth in employment because of the increase in low-paid jobs since 1994. I cannot believe that a Professor would make this kind of argument.

Low-paid jobs might well increase relative to high-paid jobs but that was in spite of government and not because of any action on the part of officials to stop artificially raising the cost of labour. Lest we forget, the Labour Relations Act, passed in 1995, forces centralised collective bargaining upon employers and employees, and, in 1999, sectoral minimum wages were introduced.

It should come as no surprise that unemployment has increased steadily over time. Government concerns itself too much with what employment contracts people can sign instead of whether everyone actually has an opportunity to sign any employment contract at all.

Conclusion
The national minimum wage is one of those curious things that demonstrates that government believes with absolute certainty that it knows better than the people themselves what is good for them. Any minimum wage presumes that people are too foolish to judge when a job would be of benefit to them or if they would be better off unemployed. I find this to be a particularly distasteful aspect of the minimum wage.

Getting yourself out of poverty is not easy and the last thing you need is some politician putting constraints on how you do it. It should be a matter of commonsense that freedom to act and cooperate is a prerequisite for building an individual’s prosperity. Every door will not be opened to you, but the government elected to oversee our interests should not be in the business of shutting those very doors.

Mpiyakhe Dhlamini is a data science researcher at the Free Market Foundation

 

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