The spectre of a national minimum wage

The jury has delivered its verdict. Organised labour, the Deputy President, the Minister of Labour and a host of other narrow vested interests have all been found guilty, on the basis of empirical evidence, of conspiring to exacerbate South Africa’s catastrophic unemployment. Once a measure to impose a national minimum wage is officially enacted, real jobs will be lost.

They pooh pooh the words of business owner, politician and former member of the US House of Representatives, Michel Buchmann: “Literally, if we took away the minimum wage - if conceivably it was gone – we could potentially virtually wipe out unemployment completely because we would be able to offer jobs at whatever level.”

The proponents of a minimum wage rely largely on emotive arguments. They claim that their overall objective is to prevent the exploitation of employees by their employers. If you examine the economic case, though, it becomes obvious that minimum wage laws exact an unbearable toll on the very people legislators say they wish to protect and whose living standards they want to see raised.

Firstly, where does one fix a minimum wage? Would it not be more beneficial to double, quadruple or multiply ten times whatever minimum is being proposed? Not possible, very simply, because there are economic constraints. Businesses have to ensure that the cost of production is lower than revenue from that production. If not, then, by definition, the business will run at a loss, and, sooner, rather than later, close. This is an insensitive and unyielding principle of economics. Ignore it at the peril of more businesses having to close down.

Those who argue for a minimum wage seem to assume that all businesses can or will be able to afford or absorb the statutorily prescribed minimum wages. The business sector comprises big, small, formal and informal entities. The compliance burden will impact small businesses the most as they have less room to manoeuver. Although the small business sector accounts for the majority of new jobs created in South Africa, it does not have the capital, the economies of scale, or the flexibility to easily adjust as labour costs rise. The consequence will therefore be a rapid loss of jobs in the small business sector. .

Already, we see that the first to lose jobs and the last to be hired are the young because they are generally the least skilled and the most inexperienced (with some not well educated). In other words, they comprise the most vulnerable sector of the labour market. An institutionalised national minimum wage law will mean the institutionalised unemployment of this sector.

A hypothetical exercise will further substantiate the point. Suppose a financially marginal gardening firm specialises in lawn mowing and garden maintenance. The firm employs 50 employees who each use a motorised lawn-mower. At some point the firm becomes subjected to a mandated sectoral or national minimum wage. The firm has three options. One option would be to lay off some of the employees and retain the more productive ones at a salary level that complies with the minimum wage. Another would be to invest more in capital equipment and replace some of the labour with advanced technology like that which has enabled some farms to operate automated crop harvesting machines from a computer in an office building. The third and perhaps unavoidable option would be to shut down the business. Employers forced to opt for this last option do not write to the government and say ‘by the way we have had to close the business as a result of your policies; please do something for the victims.’ Other than eventually being included in the statistics, these job losses will go unnoticed and those policymakers responsible for this tragedy will carry on with their lives as though nothing has happened.

For many years now the government has engaged in futile exercises aimed at dealing with our massive and still growing problem of unemployment. Once upon a time there was a Jobs Summit with organised labour, government and big business where nobody really understood the process of job-creation. There have been numerous other such costly events. All expensive undertakings but with nothing to show afterwards for all the effort. Meanwhile the number of people without work has continued to grow. More than 34% of able-bodied adults in South Africa are unemployed. That is more than 8.2 million unemployed human beings in this country alone.

Where does the arrogance to have a purported ability to solve the problem of unemployment and engender new jobs, arise? It is explained by the concept of ‘fatal conceit’ as expounded by the late economist Friedrich A Hayek, who explained that bureaucrats, planners and policy-makers seem afflicted with the erroneous belief that they, rather than those actually involved in business, as producers and consumers, know best the nature of the complexities and challenges on the ground. They believe that they can guide, shape and control the economic actions, preferences and decisions of millions of individuals. Policy-makers enact policies which have tragic consequences for so many and this continues because the policy-makers themselves do not suffer any personal consequences. At the end of the day, they are assured of their salaries and various other perks.

Unemployment figures are not of statistical significance alone. The unemployed and those who lose jobs are real people who find themselves in the unenviable position of not being able to provide for their families or for the education of their children. They become dependent on other family members or, in some cases, on their neighbours. For obvious reasons this is not sustainable. Over time their self-esteem and self-respect is eroded.

As the proponents of minimum wage laws talk glibly about preventing a ‘race to the bottom’, the real consequence of their proposals is that even more people find themselves unable to put bread on the table and provide for themselves and their families. As they sink into the abyss of starvation and loss of self-worth, some will contemplate desperate measures which may be neither legal nor moral and in some cases tragic. Instead of being drawn into the processes of wealth creation, they will join the queues holding out their hands for social grants.

The real tragedy of the unemployed, ostensibly to be protected from exploitation, is, in the words of the late economist, Joan Robinson (1903 – 1983), “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.”

Those employees who survive the onslaught of the new legislation will tend to be part of the labour aristocracy. They will be members of the labour unions. As far as the desperate millions outside the unions are concerned, perhaps policymakers have adopted the murderous communist dictator Stalin’s dogma that “The death of one man is a tragedy, the death of millions is a statistic”.

Temba A Nolutshungu

This article was first published in Weekend Argus on 5 June 2016


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