This article was first published in BusinessDay
on 19 January 2022.
The moral bankruptcy of minimum wage laws
By steadfastly sticking to the policy of a mandatory minimum wage government seems to glorify the demonstrably provable socioeconomic destructive consequences. These will be further exacerbated by the unemployment catastrophe that is unfolding before our eyes.
Curiously, the original rationale for the introduction of minimum wage laws in SA was to protect white labour from black competition. In SA’s War Against Capitalism, Prof Walter Williams cites Henry Allan Fagan, a judge of the appellate division in SA, who stated in 1960 that, in the interests of preserving and protecting the vested interests of “the way of life of the best portion of the population, the rate for the job [meaning a statutorily mandated minimum wage] and [job] reservation was necessary to protect whites, coloureds and Asiatics from Bantu”.
If we are ever to make a serious dent in SA’s cataclysmic unemployment levels, a critical review of labour policies is required. No aspect of labour market policies should be regarded as sacrosanct. All rational comments and proposals grounded in empirical evidence warrant consideration. In this context, I believe it is appropriate to question the motivation for and maintenance of minimum wage laws in SA.
Williams also notes that in the US the first federal minimum wage law, the Davis-Bacon Act of 1931, was intended to exclude black workers from competing with their white counterparts. He quotes congressman Miles C Allgood, who testified in support of that act: “That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.”
Williams further demonstrates how neatly the thinking of the Brotherhood of Railway Trainmen (a US trade union) coincided with the sentiments of the SA Mine Workers’ Union. In the 1910 Washington Agreement between the US union and the Southern Railroad Association, the union stated that “where no difference in the rate of pay between white and colored exists, the restrictions as to the percentage of Negroes to be employed does not apply”.
Their SA counterparts stated explicitly in 1919 that “It is now a question of cheap labour versus what is called ‘dear labour’, and we will have to ask the commission to use the word ‘colour’ in the absence of the minimum wage, but when that (minimum wage) is introduced we believe that most of the facilities in regards to the coloured question will automatically drop out.”
This hidden dimension of minimum wage policies is encapsulated in the following extract from an essay by US economist Prof Thomas Sowell, titled Minimum age and unintended consequences. “The net economic effect of minimum wage laws is to make less skilled, less experienced, or otherwise less desired workers more expensive ... thereby pricing many of them out of jobs. Large disparities in unemployment rates between the young and the mature, the skilled and the unskilled, and between different racial groups, have been common consequences of minimum wage laws.”
Both authors make the point that no matter whether minimum wage laws are explicitly motivated by a discriminatory agenda or driven by altruistic considerations, the effect is the same. Minimum wage laws protect the employed at the expense of the unemployed (especially the less-skilled unemployed). They protect the former from competition from the latter by making it impossible to take on unemployed workers at wages below the stipulated minimum wage. Furthermore, they constitute an artificial barrier to the employment of low-skilled jobseekers, who are generally young, inexperienced and desperate to gain a foothold in the labour market.
Developing economies are, by definition, more labour intensive and therefore have a larger supply of unskilled labour and higher levels of unemployment than capital-intensive developed countries. For this reason minimum wage laws affect them far more severely. Why then are the calls for minimum wage laws so persistent and vociferous in developing countries? It seems arguments in favour have won the moral high ground, especially in countries such as ours that have a long history of unfair discrimination and a long tradition of union activism.
Those who argue against minimum wage legislation are seen as cold, uncaring and insensitive to the “exploitation” of others, no matter how reasoned their arguments. They are accused of countenancing “starvation wages”. This emotional stance blurs the argument whether people should, as a right, be allowed to work on terms based on their own subjective preferences according to their personal socioeconomic circumstances.
Arguments in favour of minimum wage laws fall apart when confronted with the real needs of people who merely want to survive, let alone improve their lot in life. In countries where minimum wage laws exist a stark choice confronts the unemployed: starve or depend upon either the state or family. Most people prefer to work. For many, unemployment means the perpetual condemnation to misery in all its manifestations: low self-esteem, erosion of self-respect, hopelessness, and the temptation to resort to crime.
Despite these obvious consequences, a strange phenomenon persists. From the security and comfort of a fixed job some people ignore or pretend to ignore the visible misery of the unemployed, but seem to be politically driven to indulge in populist rhetoric, stubbornly beating the drum of “decent pay for decent work”. Why are these self-appointed champions of the poor bent on exacerbating their plight by denying them any opportunity to alleviate it?
Proponents of minimum wage laws and those who enact such iniquitous policies bear a heavy moral responsibility for restricting the growth of jobs and the resultant consequences. That responsibility includes the disintegration experienced by the providers and protectors of households, especially men, who, in some cases, resort to desperate actions in an effort to obtain some kind of sustenance for their families.
Objectively speaking, the minimum wage law is tantamount to saying to the unemployed: we have made the choice for you — as we do not want you to be exploited, if you cannot get a job at or above the statutorily mandated minimum wage level, tough luck, it is better for you to remain unemployed. Keep starving!
From crisis to disaster
If our onerous labour laws remain or even-more stringent ones are enacted, unemployment in SA will go from crisis to national disaster. Unemployment (already affecting 50% of our potential workforce and their dependents) is the fuse to a powder-keg that could explode at any time given the right trigger.
In Tunisia, on December 17 2010, a desperate Mohamed Bouazizi set himself alight. As a young, self-respecting, hardworking street vendor he had tried to make an honest living for himself and his family by operating a humble business, but was constantly thwarted by the enforcement of irrational and insensitive laws. This tragic incident triggered a spontaneous revolution that spread throughout much of the Middle East and still continues.
It is a mistake to place impediments in the way of people’s endeavours to make improvements to their lives. If their efforts to make an honest living are frustrated they may eventually feel justified in resorting to radical measures. Desperate people do desperate things when, to borrow the words of Thomas Hobbes, they know they can expect nothing more than for their lives to be “solitary, poor, nasty, brutish and short”.