It’s not a minimum wage that cuts jobs

By Pierre Heistein Time of article published Oct 15, 2014

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The debate around Deputy President Cyril Ramaphosa’s proposal for a national minimum wage shows an unfortunate perspective that South Africans have on the role of business in society. A minimum wage does not cut jobs; making low-skilled workers take the cut for poor and irresponsible management does.

When business comes under pressure, the wages of low-skilled workers are often one of the first areas to be considered for downsizing. It should be the last.

At the core of the debate is whether the minimum wage will decrease employment.

The economists have brought out their numbers. Professor Haroon Bhorat of UCT, among others, has shown how in most cases an increase in minimum wage does not lead to significant job losses.

This is true for most industries in South Africa (excluding agriculture), and similar results were found in case studies of Brazil and Vietnam. Even in the case of South African agriculture between 2002 and 2003, other economists have argued that the job losses were relatively small and more likely caused by other factors.

Professor Neil Rankin has addressed the impact on the central bargaining system, saying that it would be killed off by the introduction of a minimum wage and this would result in job losses.

The representatives of business, such as Herman Mashaba, Loane Sharp and Gerhard Papenfus, are wielding arguments about micro-level employment dynamics. They argue that businesses (especially small ones) can survive or create employment only if they are able to pay wages lower than the proposed minimum.

I argue, given the dismally low level of existing minimum wages, that this amounts to saying the success of business is reliant on abusive employment policies.

The unions support the introduction of a minimum wage and criticise academics such as Rankin for their analysis regarding the ensuing job losses. What the unions are not addressing, however, is the part of Rankin’s analysis that may very well be right – that the central bargaining process will lose its steam.

For the rest of us, this is excellent news.

If the government can successfully manage an effective national minimum wage measure then the tedious and destructive process of “strike season” will lose its legitimacy. Wages will no longer be determined by the annual chest-pumping of unions versus companies, but evaluated by independent study and investigation co-ordinated and enforced by government.

Any disputes will need to be taken up with government through the legal system and not taken out in the streets through the machete and barbed-wire fence system.

But the belligerent banter of minimum wage versus job creation has blinded us to the real issue at hand: if businesses cannot operate while paying a decent living wage then they shouldn’t be operating at all.

Higher labour costs do make businesses less competitive and profitable. But so too do mismanagement, inefficient processes and poor maintenance. Of the thousands of threats to business success and job creation, minimum wage is only one.

The solution is not to cut labour costs but to change production processes so that basic labour costs can be absorbed.

A minimum wage is not an extortionate demand for inflated costs but a guarantee that workers can simply survive off the fruits of their labour. If business cannot meet this basic need while remaining profitable then it has failed society entirely.

Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision-Making course. Follow him on Twitter @PierreHeistein

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