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Minimum wage, maximum unemployment

By Temba Nolutshungu Time of article published Dec 17, 2014

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Laws that stop employers from giving people work must be repealed, writes Temba Nolutshungu.

During the apartheid era, South Africans were told by the government: “If you’re black, you may not work at this job or that job.” Now policymakers are preparing to tell us: “If you can’t produce for an employer value per hour that is at least equal to the minimum wage, you may not work at that job or for any employer anywhere in the formal sector.”

That would be the message contained in a national minimum wage.

At the Nedlac summit on September 5, Deputy President Cyril Ramaphosa said: “The talking time for the (national) minimum wage is over. We must move to how we deal with the modalities.”

They were talking about the introduction of a national minimum wage that will not be confined to certain sectors only but extend across the entire country. Did any of them consider that such an act would mean that if a worker couldn’t produce for an employer value per hour that is at least equal to the national minimum wage, then that worker may not work in any job in the formal sector?

Often ignored is that worker productivity is the main determinant of what employers are willing to pay. A legislated increase in the price of labour does not increase worker productivity.

According to fundamental economic logic, if a minimum wage of R4 000 a month is deemed necessary to improve conditions for workers, then one of R40 000 a month would improve conditions even more.

What becomes obvious from this supposition is that a prescribed minimum of R40 000 would render many more people unemployable. Those who can clearly be seen to lose jobs are visible. Less noticeable are those who won’t get a job as a result of even the lesser amount being prescribed. These people are the unseen victims of minimum wage legislation.

Many minimum wage supporters argue that an artificial rise in wages would have no effect on employment.

How can employers not respond to higher wages? Being forced to pay minimum wages is one of the main reasons employers have resorted replacing workers with machines.

Why would artificially increasing the wage of low-skilled workers have no effect? Consider internships. Employers are allowed to pay less than the minimum wage. In fact they are not allowed to pay anything other than zero. To make internships illegal because they don’t abide by the minimum wage would not increase the number of opportunities for young people to gain experience. Similarly, forcing employers to pay an arbitrarily defined minimum instead of zero would also lessen their chances of obtaining experience or a job.

At the heart of the matter is the flawed, ideologically driven policy of “decent work”. Who decides what is decent work? Surely you’d want to have the right to decide for yourself what constitutes decent work?

Professor Nicoli Nattrass of the University of Cape Town says: “Decent work for the few was achieved through rising capital intensity and job destruction. This is tragic for the millions of unskilled, unemployed South Africans whose only hope of regular employment is a more labour-intensive growth path.

“Yet policymakers today regard this as undesirable, uncivilised even, hoping instead that industrial policy can somehow catapult us onto a high-wage, high-productivity growth path that will be sufficiently rapid as to be labour-demanding despite its capital-intensive nature.”

The results of the Quarterly Labour Force Survey, published recently by Statistics SA, revealed some alarming labour market trends. Our unemployment rate rose from 25.2 percent (5.067 million) in the first quarter of 2014 to 25.5 percent (5.154 million) in the second quarter – a loss of 87 000 jobs in three months, according to the strict definition. A more realistic representation of what is actually happening is the expanded definition of unemployment which includes so-called discouraged work-seekers. According to this definition, the unemployment rate in South Africa is 35.6 percent (8.332 million unemployed people).

Of the unemployed, 65.8 percent have been out of a job for longer than a year, and a staggering 65.1 percent of youth (between 15 and 24 years) are unemployed. If the low end of the labour market were allowed to function unhindered, young unskilled people would not have such a desperate struggle to get onto the first rung of the employment ladder. As most are young black people, a legislated minimum wage would have an even more negative impact on the employment prospects of black people.

Proponents of the minimum wage argue that because the school system is a failure, the government needs to help people who have been betrayed by the system. A minimum wage is not how we should fix this. It would just be another barrier making it harder for our least skilled workers to begin their careers.

Minimum wages reduce employment opportunities generally and especially for people with few skills. They prevent people who typically would find jobs in small and micro enterprises from ever gaining work experience as their productivity is not high enough to justify the wages employers would be compelled to pay them. They also make it impossible for a budding entrepreneur to grow their business by employing unskilled workers. This leaves the low-skilled unemployed in an invidious position. Without experience, they cannot find work, and without work, they cannot get experience.

At the low end of the market, unemployed people must be allowed to decide for themselves what jobs to take, and the laws that stop employers from employing them on mutually agreeable terms must be repealed.

* Temba Nolutshungu is a director of the Free Market Foundation

** The views expressed here are not necessarily those of Independent Media.

The Star

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