This year the South African labour market will enter new territory as the country implements its first ever minimum wage. The implementation of this policy experienced heavy debate with some indicating that in a country with unemployment as high as South Africa’s such a decision could have a catastrophic impact.
If one were to consider the potential impact of the decision it is estimated that 6 million working South Africans earn at or close to the minimum wage. That is half the labour force of the entire country. Conventional economics will indicate that when the pricing of a good / service is increased the demand for it decreases. Therefore, in a country where unemployment is high and there is potentially an oversupply of labour, decreasing the demand can increase the levels of unemployment. I however do think that such a principle is flawed as it overlooks a key concept in economics – utility. Utility is the measure of how an individual values a good.
If we consider that the labour is sold to firms’ individuals will try and maximise the utility of their labour. If we consider the South African context, one could argue that with there being no price floor for labour, workers were often exploited and this often created a disincentive for employment. Given the high costs of seeking a job and then maintaining that job which includes the high costs of transportation often employees are living day to day which impacts on their ability to sustain employment. The national minimum wage, at a basic level allows an individual at least to be aware of the level at which they could maximise their utility.
There is also a case of there being an expectation gap in the market of what a job pays and what the individual expects to be paid for a job. This again may lead to disincentive for potential work seekers in the market. Through the publishing of the rates for the minimum wage and sectoral approach that has been taken, the expectation gap can at least be partially addressed.
South Africa is now possibly the most unequal country on earth. We knew that this day would come given that we have always been near the top of inequality globally. Recently studies have shown clear linkages between the high levels of inequality and violent crime. I have argued for the implementation of wealth taxes as a measure to reduce inequality but firms who become obliged to pay the national minimum wage would do well to remember the debate on inequality when implementing. Yes, an increase in wages for one grouping may come at the expense of other economic activities – however if it contributes to an overall betterment of the country it has potential long term effects for our prospects as a nation.
Dignity is an often-overlooked concept. Human dignity should be at the core of everything we do from a policy perspective. We would do well to remember that many of those we encounter in the labour force everyday must wake up before sunrise, take multiple forms of transport in dangerous conditions and return home often after their children have gone to bed. This is to create a better life for their children and their families. If the implementation of the minimum wage returns a small measure of dignity, we would have started a process of potentially improving our economic prospects – people perform better when they have their dignity restored.
Conventional economics are certainly not to be overlooked – we must however analyse the key non-economic factors when making decisions to ensure that we reach decisions that are meaningful to our citizens.
Waseem Carrim is the chief executive of the National Youth Development Agency.