Indecent consequences of the “decent wage” mantra

South Africa’s economy is in recession. Many jobs are being lost and others are in jeopardy. Imposing a national minimum wage under current circumstaces verges on insanity, an act of unbounded cruelty against the most vulnerable workers in the country. If a national minimum wage is imposed, a large-scale loss of jobs among low-income workers will be inevitable. Will the perpetrators and their academic soothsayers be able to live with their consciences?

Arguments about the minimum wage and the so-called “decent wage” have recently raged in the US, South Africa and elsewhere. There are few countries in the world that have no minimum wage but fortunately for the poor, most countries do not make it universal, allowing the unskilled, young, old or otherwise disadvantaged to earn some kind of wage, in some fields of work, to keep themselves alive.

That a euphemism such as a “decent wage” can sound so good, so decent, so honest, when its consequences can be so harsh, so cruel, and so totally indecent, beggars belief. For many unfortunate people its correct description is not the minimum wage but the “zero wage” because that is what many currently employed people will earn when they lose their jobs if a national minimum wage is introduced under the cloak of a “decent wage”.

It is all very well to speak hypothetically, do mathematical calculations and state as Gilad Isaacs from Wits University’s National Minimum Wage Research Initiative did in a radio interview, when asked by the interviewer about the effect on employment of a national minimum wage. His response was that the “impact on employment is very slight, negligible or statistically insignificant”. How slight? How negligible? How statistically insignificant according to the “international evidence and his organisation’s modelling”? So there will be job losses, but the people who lose their jobs will be insignificant – not worth worrying about!

And the amount of this national minimum that is to be established with such a high degree of certainty? According to Isaacs: “It’s the million Dollar question. We did four different modelling exercises, a minimalist one which we set at R2,250, a maximalist one at R6,000 and then two indexation ones in between that, and what I mean by indexation is that we start at a certain level which is a percentage of the average wage and we increase it over a five year period to allow the economy to adjust, and that is actually a policy option which is open to us.” Does this not sound suspiciously like some form of game, a diabolical game with people’s livelihoods at stake?

A national minimum wage, apparently determined with “absolute accuracy”, somewhere between R2,250 and R6,000, is to emerge from this convoluted game, and this figure is set to be imposed on all employers in the country. If the minimum is to be set at a level at which it will do no harm, there is no point in imposing it. The higher it is set, the more jobs will be lost due to lay-offs, but most importantly due to the even higher barrier to entry into jobs that it will create for the 8.2 million people who are currently unemployed.

Mothers who hire care-givers to look after their children may be forced to stop work and revert to welfare. Farming enterprises that hire large numbers of unskilled workers may be forced to replace even more workers with machines. Small businesses that hire most of the unskilled people in the country will have to stop taking in the young and unskilled and even face the possibility of having to close down their businesses. Households who currently employ domestic workers, many of whom are at the lower end of wage scales, will possibly be forced to revert to doing their own housework.

Wits University’s National Minimum Wage Initiative has received a substantial amount of coverage. In particular, it has claimed to have done extensive international research on the effects of minimum wages on employment. It claims that according to the literature the effect has been “insignificant”. I draw their attention to a new study from Canada’s highly regarded Fraser Institute, based on an extensive literature search, which comes to a very different conclusion.                

In the new study, Raising the Minimum Wage: Misguided Policy, Unintended Consequences, published by Canada’s Fraser Institute (March 2016), the authors review a large body of literature on the minimum wage issue. An important finding was that, “Canadian literature generally finds that a 10% increase in the minimum wage reduces employment among teens and young adults (ages 15 to 24) by 3% to 6%. By making it harder for low-skilled workers to obtain an entry-level position, the minimum wage may perversely hinder the development of human capital and harm the long-term career prospects of the very people it ostensibly helps. Indeed, Canadian researchers have found that hiking the minimum wage has no statistically significant impact on poverty and in some cases can increase it.”

As a consequence of their findings the authors warn that, “Policymakers must be very cautious when considering large minimum wage hikes. They certainly should not believe that the latest research gives a green light to large policy shifts; economists saying otherwise are exaggerating what the literature actually contains.”

Another note of caution. Has any research been done to establish why South Africa has 33.8 per cent of its potential workforce unemployed. Have the unemployed been asked why they are unable to get jobs under current conditions? Have they been asked if a national minimum wage will improve or destroy their chances of getting jobs? Have the employed and their employers in the rural areas, where wages are much lower than in the urban areas, been asked if a high national minimum wage will lead to business disruptions and job losses?

Of great concern is the concentration of attention on increasing the wages of the 5 million low-income workers who earn less than R4,000 per month with no sign of proper attention being paid to the plight of the 8.2 million who are earning R0,000. They are the unemployed, 3.4 million of whom have been unemployed for more than a year and the discouraged 2.2 million who have given up looking for work. They are our country’s forgotten people.

Policies that have to be adopted are those that will lead to high economic growth, an increase in the demand for labour, the absorption of the unemployed into the economy and an increase in all wages. This cannot include a national minimum wage, which will increase unemployment, hamper economic activity, and cause havoc in a country with a 35.8 per cent unemployment rate.

Author: Eustace Davie is a Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.  

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