South Africa’s deputy president announced a planned ‘national minimum wage’ over the weekend. The proposal is R3,500 per month, but nothing is firmly decided yet. According to every news source I could find, 47% of South Africa’s employed labour force earn less than that.
So. The issue of a minimum wage is a fraught one – and let me start with the main arguments against it.
Here’s a video that explains it:
The main points from the above clip:
- Imposing a higher minimum wage does not mean that every worker will be paid a higher wage – it just means a higher wage for those workers that the employer chooses to keep.
- An employer will only hire someone whose cost (ie. wage) is less than the benefit of having that person on the staff. That is: the employer must profit off you – which is reason businesses hire people, after all.
- The example is given of a burger flipper. Let’s say that you flip 90 burgers in an hour, and I can make 10 cents per burger before I take your wage into account (ie. $9 per hour). If I’m paying you $7 per hour, that means my profit is $2 per hour.
- If the minimum wage is increased to $10 per hour, then you’re actually going to cost me $1 per hour in profit.
- So you’ll get fired.
- The only people that benefit from a minimum wage are those that are good workers (ie. those flipping more than 100 burgers an hour).
- But those guys would probably get raises anyway. Not just because they’re good – the problem is that if you don’t offer them a raise, your competitors will poach them away with a higher wage.
- So all that ends up happening is that the unskilled workers get fired, and the more-skilled workers get the pay increases that were already coming.
- Everyone that had something to lose therefore loses.
Which does sound quite logical.
Only, there are some flaws there.
Firstly, the empirical evidence is not all that strong in favour of minimum wages being such a bad thing. There’s this letter to the US government, signed by 600 economists (including Joe Stiglitz, Jeffrey Sachs, Larry Summers, and a few other nobel laureates), saying this:
In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.
If you feel like reading some of that literature, there are lots of links on this page.
Here are some of the problems that I see in the standard “minimum wages reduce employment” narrative:
- Some of the increased minimum wage will be passed on to customers. When there is something like an industry-wide cost increase, employers tend to increase prices in order to cover their higher costs. “Cost-cutting” is not the only available response here.
- Identifying who should be fired in the cost-benefit analysis of slightly higher wages is extraordinarily difficult in practice. Sure – some companies may try to track it. But many will just use the opportunity to fire some people that they were going to fire anyway; and the rest will grumble and moan and let the inertia roll. Personally – I think that’s why some of the empirical evidence for the libertarian argument is weaker than you might expect – people are too lazy to be ruthlessly economical in their decision-making. My guess is that the biggest impact of a minimum wage would be: employers stop hiring new people rather than actually doing much firing.
- More productive workers don’t necessarily get rewarded with appropriately higher wages. At all. Competitors are hardly going to spend their time keeping track of good burger flippers. That task will probably be delegated to branch managers, who are more likely to be concerned with keeping everyone in line than with finding the best burger flipper (and avoiding hiring anyone that might end up competing with them for promotions). The competitive-bidding principle may apply to high wage earners, where there’s a very clear incentive to find the best person for your buck. But when you’re talking about minimum wage earners, the scale is just too large… So a higher minimum wage might actually end up rewarding more productive workers.
That said, when it comes to South Africa, I’m not sure that the empirical evidence would be all in favour of a national minimum wage:
- We have large parts of our work force that would probably be excluded from this proposed minimum wage (part-time workers, workers in the informal sector, subsistent farmers and small entrepreneurs), so the upside won’t necessarily be that great.
- At the same time, many low income workers are already covered by powerful unions, industry-specific minimum wages, national bargaining councils and a highly frustrating Ministry of Labour that is always willing to wave a legislative magic wand and make the union-big-company-negotiated outcomes binding on the entire industry.
Frankly (as I’ve written before), I think that you could probably find 600 economists to write a letter to the SA government saying that one of the most pressing issues for the SA economy is the labour market – but what they’d be demanding is less legislation, not more of it.
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.
Mark November 23, 2016 at 14:17
Disclaimer, I am in favour of a minimum wage in SA, mainly because of the huge disconnect between the supply and demand for labour
so I think part of the issue in SA is not an economic one but a social one of paying a fair wage even if that doesn’t end up making much economic impact.
The main point I take umbrage in is the idea that big companies are so profit driven that they would fire people or increase their cost to consumer, what about the 3rd option of tolerating a lower profit margin? Obviously here I am talking about big listed companies, not SMME’s. If the companies are going to be clever they’d spend more on training their slightly more expensive workers to get more productivity. Following on from this, if I was a ruthlessly efficient CEO I’d be cutting down on the mountains of middle management and back office support which costs a factor of 10 times as much and adds probably a factor of 10 less economic output.
An interesting comment I often saw in the VOX POP was that a higher minimum wage would encourage more people to look for work, not something I’d ever considered. I am guessing that the economic model doesn’t factor in that their is a price below which the unemployed would refuse to work.
Ultimately I think the minimum wage debate is dominated by the American style capitalism and all their prejudices against “socialism”
johan November 24, 2016 at 06:26
I don’t think a minimum wage will have much impact. Those workers that are not protected will continue to be exploited, and those that are not protected by big, powerful unions don’t need laws to push for higher wages.
It’s also worth pointing out that in many cases if the worker is producing $10 worth of output per hour, he may only be earning $1 – so the margins in the video aren’t really realistic.Reply
Jayson November 24, 2016 at 07:20
The only problem is that I think the earning-output argument is a bit of a false equivalence. ‘output’ is not profit – it’s just the revenue. The company will have other costs (raw materials, rental, utilities, the cost of capital, etc) to go along with that.
Also, I wouldn’t underestimate the impact of a minimum wage on workers that aren’t currently supported by trade unions. Most companies will choose to be compliant (South Africa does have quite a strong connection with compliance – SARS and the FSB are two of our strongest institutions). And where they’re not, there’s the CCMA – and no company really wants to be pulled in front of the CCMA to deal with disgruntled employee who, as it turns out, was being paid less than the minimum wage…Reply
Mark November 24, 2016 at 11:06
The minimum wage also gives a target against which to judge a salary.Reply