Given the great economic difficulty South Africans will be facing during this Covid-19 pandemic, now more than ever it is important to lift unnecessary burdens on both businesses and labour. This includes unnecessary barriers to entering the job market for South Africans who are unemployed. To this end, there is an obvious answer: scrap the minimum wage.
Price fixing is bad in any economy. Prices reflect the value of something, but as Leonard Read showed in his story I, Pencil, the price of a good on the shelf at a shop is the result of thousands of transactions and decisions.
Economies today are vast, international networks with billions of transactions taking place every day. For a single entity to fix a price on any good or service would inevitably be at odds with market forces to some extent. This would either cause shortages or surpluses, depending on if the price was too high or too low.
Since the collapse of the Berlin Wall in 1989 socialist command economies – where government centrally plans the prices of goods – have generally disappeared, globally, in favour of market economies.
Greatest miracles
The resulting prosperity and growth has been one of the greatest miracles in human history. Probably one of the best examples of this is China which once was a centrally planned economy but began instituting market reforms in the 1980s. The result was hundreds of millions of people lifted out of poverty and the growth of China from a poor, backward economy prone to famine to one of the world’s great superpowers and a leading technological innovator.
It is only a small number of hold-outs that continue the command economy model which still results in economic absurdities. For example, in Cuba engineers and doctors earn less money than taxi drivers. This is because payment as a taxi driver is dependent on how far you drive rather than what wage the government decides for you.
Even granting minimum-wage proponents the most charitable assumptions in reading their forecasts, the actual results have been far from what was predicted.
The new National Minimum Wage came into effect on 1 January 2019. Unemployment in the first quarter of 2019 was already the highest in more than a decade, at 27.6%. By the fourth quarter this had increased to 29.1%.
There are various reasons to which this can be attributed – credit ratings downgrades, talk of National Health Insurance, and expropriation without compensation causing uncertainty – but it’s reasonable to think that putting a price floor on labour in an economy with less demand for labour will get you the result of unemployment.
Actual value
Similarly, one would never expect that putting a price floor on sand in the Sahara would somehow result in the value of sand increasing. Changing the price of something does not automatically change the value of that thing, but legislating a price floor above the value of something will simply give you the result of fewer people buying it. This is because the cost of buying that item has increased while the actual value has not.
Of course, economies are vastly more complicated than this, but a mistake is all too often made in thinking that the value of a product necessarily changes after a change in price. It is the latter which follows the former, not the other way around. This is also why putting controls on currency exchange inevitably leads to black markets, as was the case with the Zimbabwean Bond Note about which I have previously written.
South Africa now enters 2020 in a terrible economic state. Even without a coronavirus pandemic to deal with, consistent uncertainty for investors, increasing deficits and an inability to supply electricity effectively capped the country’s growth forecasts at one percent – which is not even growth in real terms when one accounts for inflation and population growth.
Lockdown
Now we have the same situation, only with the addition of a lockdown and restrictions on non-essential services. The result is that the economy will certainly contract this year – from anywhere between two and ten percent. And behind these figures are hundreds of thousands – potentially even millions – of people who will be thrown out of work and left destitute.
With this in mind, we need to do everything in our power to get South Africa back on a pro-growth track. Once the pandemic passes, the work will not be over and, as economist Dawie Roodt says, the country will take years to recover.
The issue of unemployment should be of great importance. Unemployment is not just a statistic. Each person unemployed creates a ripple effect that is not just economic, but also social. A person could go from living a stable, independent life to having to rely on others, or worse, living in poverty.
Consider this also in the context of households which may have only one breadwinner. If that breadwinner becomes unemployed, who puts food on the table? What social problems might occur as a result? That is just one person becoming unemployed, but when the figure is multiplied by a few hundred thousand, one begins to see the reality of the humanitarian crisis which unemployment can cause.
Therefore, in order to minimise retrenchments to the greatest extent possible, we should temporarily scrap the minimum wage until the economy reaches a point of growth in real terms and businesses are in a position to hire again.
Avoid retrenchments
With revenues reduced enormously, slow growth forecasts, and reams of labour legislation, it will take businesses a long time to re-hire any staff they have retrenched. The best thing we could do to mitigate this is to avoid these retrenchments, or at least try to have as few of them as possible.
As a final note on this, one must always remember not to judge policies by their intentions, but rather by their outcome. The intention of the minimum wage is to raise wages, but the real minimum wage is zero. Policies like this do not raise wages overall, they simply raise it for those lucky enough to keep their jobs, and they serve as an extra barrier to entry for the unemployed.
For the sake of all those whose jobs and future prospects are on the line during this pandemic, we should scrap the minimum wage.
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