A National Minimum Wage: No Lasting Benefit

A NATIONAL MINIMUM WAGE

NO LASTING BENEFIT

 Opinion piece by Gerhard Papenfus

 

 

The controversial topic of government considering to introduce a national minimum wage has featured prominently in the media. There is no shortage of opinions (often extremely polarised) on this complex issue and we may very well have reached a point where government is regretting having even introduced this sensitive subject.

 

By now, government must have realised the predicament: set the wage threshold too high and it will result in job losses; set the threshold too low and it becomes meaningless. 

 

This is the kind of dilemma all 'developmental states' (read 'interventionist states') consistently experience. It is the dilemma governments experience when they want to achieve a particular goal, not believing the dominant influence of market powers. For each 'solution' they create, many more quandaries arise; that is because disobeying the 'rules' of a free market confuses and eventually weakens the market.

 

Government has also probably come to the realisation that one cannot adopt a 'one size fits all' (national minimum wage) approach and is therefore, as it appears, considering having a dispensation where different sectors are treated differently. But that is no different from what we already have through collective bargaining and sectoral determinations.

 

According to the World Economic Forum (WEF) Global Competitiveness Index for 2015, out of 144 countries, and in respect of the relevant disciplines, South Africa is ranked 144 (quality of maths and science education); 143 (hiring and firing practices); 140 (education as a whole); 139 (flexibility in wage determination); 136 (pay and productivity) and 133 (quality of primary education).

 

At least one reason for South Africa's persistently high unemployment must vest in these areas.

 

It makes no sense to 'reward' or protect an unskilled and poorly educated workforce with inflexible wage arrangements and high wages, or rather wages not justified within a market over which no-one has any control, or at least very limited control (especially within the global market context). 

 

You can't then, at the same time, 'reward' the same workforce, unskilled and perhaps already overpaid (again within the context of a global competitive market), with a vast number of rights – one of the most protective dismissal arrangements in the world and imbalances caused by strike arrangements.

 

Within this constraining context, the employment of an unskilled worker becomes very unattractive, and that is where South Africa's largest unemployment challenge lies – millions of poorly skilled and poorly educated people. Even if the economy is growing satisfactorily, which is not the case, the prospects for this category of the population remains limited, unless the market is liberated.

 

If you put into the mix a largely low-skilled workforce, poor education and extremely rigid labour law arrangements, any fiddling with minimum wages, or at least out-of-proportion interference, will lead to increased unemployment. In a situation where almost half the population is unemployed, and youth unemployment is even higher, such a policy direction is short-sighted, even reckless. 

 

Policymakers need to understand that increased job security (inflexible labour laws), without matching skills and productivity, is not reconcilable with high wages. Workers cannot have it both ways. That's the law of the labour market. All labour markets.

 

The market is sensitive to interference because a sustainable job is a job which is a response to a market-driven demand, paid for at a level determined by market powers. Jobs created and paid for in any other manner are not sustainable and a wage determined outside of market determined parameters would lead to job shedding.

 

As a result of consistently disregarding the forces of demand and supply, we are already incapable of reversing unemployment. A recent United Nations (UN) Development Inclusiveness Index suggests that SA is moving in the wrong direction in terms of inclusive growth. Keeping job seekers out of the labour market through a myriad of measures (including minimum wages), to which the market simply won't respond positively, results in the constant widening of the gap between 'rich' and 'poor', simply because you cannot replace a job – any job, even a low paid job – with anything else, least of all a grant.

 

Those who argue in favour of a minimum wage no longer hold out Brazil as an example of how successful the experiment can be. Brazil's current economic dilemma makes it a poor case study. 

 

The new sweetheart (for this argument) is Germany, where a minimum wage has just been introduced. The German minimum wage is the compromise result of the coalition between Germany's strongest political party, the free market orientated Christian Democrats, and the social economy orientated Social Democrats, with the Social Democrats occupying the Labour Portfolio. Germany, however, is not a good benchmark. Firstly, the German population is hugely divided on this issue. Secondly, the impact of the introduction of a minimum wage will only become clear over time. Thirdly, Germany boasts a 4.7% unemployment rate, superb education and skills development programmes and, consequently, an unmatched highly skilled and productive workforce.

 

Proponents of the minimum wage also argue that employers are inclined to abuse workers. Even to the extent that this holds true, this won't be changed by a statutory minimum wage. If the inclination of the employer dictates that he does not want to pay a higher wage, notwithstanding the merit, he won't do so and no legislation will force him to do so. He will find alternatives, one of which is not to employ at all – and this cannot be prevented through any form of legislation. A disregard for the value of a person cannot be addressed through a statute; only a change of 'heart' and new insights, within the realities of a free market, can.

 

Anyone desiring a sustainable and prospering business will realise, sooner or later, that this cannot be attained without paying workers well. If a particular business chooses to ignore this reality, somebody else will capitalise on it. This is the beauty of the free market system.

 

Although some workers might get temporary relief through the introduction of a minimum wage, universal market powers dictate that good workers do not need that type of relief, and for unproductive workers the relief will only be temporary. If the value of the performance does not match the wage, the worker will soon find his/her job at risk.

 

Lasting increased wealth, which includes improved wages, can only be the result of economic growth, which in turn will be the result of improved skills and education, improved ethics in the workplace by both the employer and the worker, the total eradication of a sense of entitlement and the acceptance of personal responsibility. There is no other formula.

 

Setting a minimum wage is riding rough shod over the sacrifices and leadership required for a market-driven formula to succeed. Substituting this market-driven formula with an attempt to simply place the onus on the employer, without the matching performance and productivity by the worker, and completely ignoring the market forces, just won't suffice. Increased unemployment will be the result.