How best to increase unemployment? Introduce a National Minimum Wage
The expert advisory committee has proposed a national minimum wage of R3,500 to combat South Africa’s high levels of poverty and inequality. If the goal is truly to reduce poverty and inequality, then do not expect to see much improvement. In fact, given the high and rising rate of unemployment, inequality and poverty are more likely to worsen.
Interestingly, the proposal makes special exemptions for agriculture and domestic workers because the evidence shows that increased wages in these sectors impact negatively on employment. If these sectors obey the law of demand (as the price of a good or service increases, the demand for the good or service will decrease and vice versa), why does the committee think all of the other sectors in the economy will not suffer the same outcome?
The introduction of a national minimum wage is one of the surest ways to prevent unskilled people with little or no work experience from ever entering the job market. South Africa has one of the highest and most enduring unemployment rates in the world. Statistics SA’s quarterly labour force survey reveals alarming labour market trends. The unemployment rate increased from 25% (5.23million) in the second quarter of 2015 to 26.6% (5.634million) in the second quarter of 2016, a loss of more than 400,000 jobs according to the strict definition.
A more realistic representation of what is happening is the expanded definition of unemployment, which includes so-called discouraged work-seekers and demonstrates that more than 500,000 jobs were lost over the course of the year. This puts the unemployment rate at 36.4% (8.880million unemployed people). Of the unemployed, more than two thirds (66.9%) have been out of a job for longer than a year and a staggering 66.3% are between the ages of 15 and 24 years.
Inequality and poverty persist, not because those who have employment earn too little or because some people earn too much. They exist because SA has nearly 9 million unemployed people. You do not need to be trained in economics to understand that there is something seriously wrong with the typical explanations provided of how the introduction of a national minimum wage will miraculously solve South Africa’s poverty, inequality and unemployment problems. Wage hikes that follow productivity increases should be welcomed by all, but those that are increased by political decree without an accompanying increase in productivity, should be rejected.
Employers, trying to operate a company within their means, instead of employing more workers, will opt for mechanisation wherever possible. Some employers may choose to forgo profits which will stall investment in their businesses, halt expansion, and, eventually, cause workers’ wages and prospects to stagnate. To cover increased wage payments, employers will have no choice but to increase the prices of their product. Rich people may easily accommodate increased prices but even they will only pay a price they deem justifiable. Not only will workers suffer from the stagnation, but poor people, in general, who are far more sensitive to even minor price increases, will suffer too.
The introduction of a national minimum wage will force more people into the informal and underground sectors as companies, in order to cope, either shift away from labour into capital or simply reduce production and their labour requirement. Worst of all, it will cause greater pain and misery for those who cannot find a job and have no idea why this is so. If the government really cares about the poor, it should open up the economy to give the poor greater opportunities by removing all the artificial barriers that impede the functioning of the market.
Statement issued by the Free Market Foundation, 21 November 2016