Unemployment: The logical outcome of the minimum wage

These men were dumped in a remote town after a wage dispute with a farmer. Photo: Joseph Chirume of GroundUp
South Africa’s new National Minimum Wage (NMW) has been touted as an economic miracle in the making that will help create jobs, grow the economy, and reduce inequality. Rather than being a miracle, a National Bureau of Economic Research working paper finds that a minimum wage instead invites disaster. Chris Huttingh writes
Part of The Minimum Wage Study (University of Washington) which was supported and funded in part by the Seattle city government, the paper entitled ‘Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle’ shows that low-wage workers lost on average $125 per month – equivalent to an individual earnings decline of $1,500 per year. Due to the increased wage, employers had to cut their payrolls, reduce workers’ hours and let workers go – they simply cannot afford them.
Another finding was that the number of hours worked by low-wage workers fell by 3.5 million hours per quarter. People who had managed to keep their jobs, could no longer work the same number of hours because their employers simply could not afford to have them continue to do so at the increased mandatory wage rate. Fewer hours worked meant that remuneration paid to low-wage workers suffered a dramatic hit, totalling roughly $120 million on an annual basis, as the paper indicates.
The paper employs brutal, sobering honesty that we do not normally see used by any state entity. Minimum wage advocates (both at home and abroad) see it as a noble goal in their endeavour to help the poor and unemployed. But, any minimum wage distorts the cost of labour. It negates a person’s ability to trade rationally with one another in the form of employment. Businesses can no longer employ people on an objective basis, but must allow for the distortion. Too often this means they simply decide not to employ people rather than risking being burdened with the higher cost. The minimum wage is an immoral measure because it is imposed on employees through the force of government whereby their ability to negotiate with employers on their own terms is completely negated.
A minimum wage does not come free. For every grandiose socialist plan, there will always be a cost that must be paid by someone, at some point along the line. Corruption and political ineptitude mean that South Africans are constantly forced to make difficult choices.
Those who have businesses, want to be able to negotiate a salary with potential employees. If forced to pay wages above what they can accommodate, employers will favour the older, more experienced person, instead of someone less skilled who they will be forced to keep on.
Milton Friedman said that “a minimum wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills.” In the first quarter of 2017, SA’s unemployment rate sat at 27,7% – the highest since 2003. University fees are ever increasing and young people cannot easily get the qualifications they need to get a job. To avoid going out of business, savvy employers will choose the potential employee who will not cost them more than they can gain – the minimum wage increases that potential cost.
Given what the latest evidence produced by the University of Washington shows, and what we have discussed here, politicians and supporters of the NMW should give pause for concern for the millions of low-skilled and unemployed individuals that are desperately trying to find work and improve their lot in life.
Chris Hattingh is a Researcher at the Free Market Foundation

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