R3,5k SA minimum wage too high

> Tim Worstall

SOUTH Africa has decided that there should be a national minimum wage and that that wage should be R 3,500 a month.

That’s a little under $250 US a month. And the problem with this is that it’s a very bad decision–and the reason it’s a bad decision is that this wage is simply much too high.

Yes, $250 a month is too high a minimum wage. This of course puts me among the capitalist oppressors willing to grind the faces of the poor into the dust. And given that this is South Africa we could probably accuse me of racism too.

However, it’s still true. For South Africa is the prime example, the poster child, of what happens to an economy when the wage level is too high for the local productivity. Vast numbers of people simply cannot get a job, any job, when this happens–and in South Africa today vast numbers of people cannot get a job, any job, because wages are too high for local productivity.

In such circumstances insisting upon higher wages for a large portion of the workforce is simply going to mean even more people not able to get a job, any job. But that’s what they’re going to do:

The African National Congress on Sunday threw its weight behind the proposed national minimum wage of R3500‚ calling it “credible and clearly supported by clear evidence”.

That isn’t, to put it mildly, my reading of the evidence.

The Economic Freedom Fighters (EFF) on Sunday said it rejected the national minimum wage of R3500‚ saying the proposal announced by Deputy President Cyril Ramaphosa “favours business at the expense of workers”.

No, a minimum wage this high does not favour the workers at all. For large numbers of people will find that they’re not able to be workers with this rate imposed.

The Gauteng Province branch of the Young Communist League of SA “rejects outright the proposed minimum wage”, Gauteng provincial secretary Alex Mdakane said in a statement on Sunday.

“This is in fact an insult to the more than 47% of South Africans who wake up every morning to be exploited for a pittance of just below R3,500,” said Mdakane.

And it’s that very fact that so many people do earn below it that causes the problem.

While the proposed R3 500 can’t lift the poorest South Africans out of crippling poverty, it would go a long way in offering relief to 41.6 percent of workers earning less than R3 000 a month.

Nope, it’s going to mean that some number of those currently earning blow R 3,000 a month will be earning nothing instead.

To lay out the basic economics of the minimum wage. A low minimum wage has pretty much no economic effect whatsoever. Because very few people get very low wages–thus a low wage floor affects very few. Obviously, a high minimum wage affects many people for the same reason. We also know that employers will only pay what a job is worth. This worth, this value, is not the emotional value, or the social value, nor even is it determined by how much we think we’d like people to have to live upon. An employer will pay wages up to the amount, and only up to the amount, that the labour benefits the employer.

Which brings us to trying to define what is high and low–and the determinant there is the productivity of the labour. This is something that obviously varies across time and place. And as a rough guide we find that when minimum wages go over 45 to 50% of the median wage in a time and place then that’s too high. Too high because too many people lose their jobs as their labour is no longer worth enough to employers for them to still have jobs.

This is just the way the universe works and no, there is no either simple or complex way around this.

Too high a wage level, relative to local productivity, will cause mass unemployment.

Which brings us to South Africa today. And the usual analysis of South Africa is that wage levels are already too high. The country is covered by a patchwork, a leaky one, of sectoral and union agreements which determine wages in the formal economy. The unemployment rate is 25%–and that just among those formally looking for work. The population to employment ratio is in the mid 40s percent or so level–compared to the well above 60% in the US that we currently worry about. And that 41% population ratio is including the informal economy as well as the formal.

Any economist looking at these numbers would say, yup, that’s right, wages are just too high for local productivity. That’s why so many people can’t get a job. Simply because it doesn’t pay to employ them.

And thus an insistence on raising the minimum wage is just not going to work, is it? It’s going to make our basic problem worse, lead to ever fewer people being able to get the work that they desire.

It’s entirely true that we’d just love every South African to have more than $250 a month to live upon. I think it will be a very happy day when they all get the roughly £2,000 a month of my native England, or the $3,000 or so of the US. But for that to come true the country as a whole has to be richer. Which is the same statement as the productivity of labour has to rise. For what South Africans get to consume is going to be determined solely by what South Africans produce. The higher labour productivity the more they will produce and thus the more that can be consumed. Which is, again, the same statement as the country getting richer as it is also the same statement as wages will rise.

The truth is that R 3,500, or $250 a month, looks low as a national minimum wage for South Africa. But actually it’s much too high, the country just isn’t rich enough to be able to afford it. – Forbes

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