Minimum wages taunt the poor

Last week the parliamentary portfolio committee on labour wrapped-up its nationwide road trip to get the public’s views on the proposed national minimum wage. Participants at these hearings proposed levels varying between R4,500 and R15,000. Special interest lobby groups also voiced their estimates. COSATU’s Gauteng secretary called for a national minimum wage of R7,000 and a South African Communications Union representative, not to be outdone, proposed R12,500.

The task of the portfolio committee is “limited to seeking input on the desired level for a national minimum wage” and not whether or not the country should have a national minimum wage at all. Moreover, according to the portfolio committee’s chairwoman, “Participants… need to consider a national minimum wage that would address inequality”.

To focus attention on inequality between incomes of people who have jobs makes a mockery of the millions of people who are unemployed and have been unemployed for a very long time with no idea why. It also misdiagnoses the severe underlying problems of the desperate labour and skill shortage in this country.

The primary role of special interest lobby groups is to protect their members’ interests, whatever the cost. For trade unions to ensure their members’ wages are secure, it includes blocking any potential competition from low-skilled individuals who would be willing to work for lower wages and under less stringent working conditions. As long as income earning individuals are protected in this way whilst others are denied any opportunity to enter the market, the issue of income inequality will never be addressed.

Big business is also likely to favour a national minimum wage – it protects them from competition, typically small businesses. However, they should be very wary of what they agree to because what they are faced with, is simply the thin edge of the wedge. Considering the current national average salary is R15,000 a month, will big business still be cheering when R7,500 is deemed insufficient because inequality has not decreased enough? And who will ever be able to determine when we have reached a “correct level” of equality?

What about the “unintended consequences” of this proposal? What will happen to those workers who cannot produce value per hour that is at least equal to the national minimum wage? According to spokeswoman for The Women on Farms Project, Carmen Louw, more than 73,000 jobs were lost in the Western Cape farm sector after the statutory minimum wage was raised by more than 50 per cent in the wake of the violent farm worker strikes of 2012. The official government statistical agency, Statistics South Africa, confirms this trend.

A national minimum wage may not appear to affect the rate of unemployment but it will immediately reduce the available employment opportunities. Employers will respond by increasing mechanisation rather than employing more workers wherever possible. Minimum wages taunt the poor by constantly putting jobs beyond their reach.

Some employers may choose to forgo profits but this will stall investment in their businesses, which will halt any expansion, and, eventually, cause workers’ wages to stagnate. To cover increased wage payments, employers will have no choice but to increase the prices of their product. Rich people can easily accommodate increased prices, but poor people who are far more sensitive to price increases will suffer. Especially those who do not earn a wage at all. International experience demonstrates that those on or near the minimum wage tend to be the consumers of the production of other minimum wage workers. In other words the cost of the higher minimum wages will be borne almost entirely by the poor.

The problem is not income inequality, it is one of opportunity. Policies designed to reduce income inequality inevitably involve the redistribution of income through social welfare programmes, a progressive tax rate regime, and outright discrimination; policies that discourage savings and investment, retard economic growth and opportunity, and discourage the hiring of labour. If government were to adopt policies based on equality before the law and designed to enhance equality of opportunity, it would quickly foster economic growth, increase the size of the available pie and make it possible for everyone to take a bite.

Economic historian, Professor Deidre McCloskey, says, “There’s not enough money earned by the rich… to permanently help the poor. What permanently helps the poor is what we have done in the past two centuries – make the global wealth pie bigger. How much bigger? A factor of anywhere from 30 to 100 times. The poor – your ancestors and mine, for example – got better off, radically so, not by redistribution or trade unions or regulation, but by economic growth on a unique and immense scale”.

And if the economy is allowed to grow, there will be more than enough pie out there to share with everyone and no need to snatch crumbs out of each other’s mouths.

Author: Jasson Urbach is an Economist and 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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