This article was previously written as a research article in September 2016 and has been repurposed as the information contained here is still relevant and informative. In February 2017 the national minimum wage was set to R20/hour or R3500/month for workers who work 40 hour weeks. Deputy president Cyril Ramaphosa stressed that even though R3500 was still not a livable income, 6.6 million workers in South Africa who earn below R3,500 a month would still benefit from this new implementation of a national minimum wage which will take effect in May 2018.
This article will discuss the effects of implementing a national minimum wage, such as how a national minimum wage influences the market clearing wage, how does implementation of a minimum wage impact markets with high versus a low elasticity of labour demand, and how South Africa as a country can balance the achievement of its development goals such as every citizen having a livable income whilst tackling the issue of the 27% unemployment rate.
What is a national minimum wage?
To begin we will define a minimum wage as the lowest amount allowed by law for employers to pay their employees, this essentially is a price floor below which no employee can be legally paid. By implementing a national minimum wage in South Africa the government will be setting a price floor for wages paid to workers. Secondly we will define a market clearing wage as the price at which the demand for workers services (by employers) is equal to the quantity supplied. In a perfect system employees would want to earn a certain amount for example R12 500 but employers would only be willing to pay R8 000 for their services, therefore at R8 000 employers would find that not many people are willing to take that job and people are going to their competitors who pay R 10 000 for example so the employers who pay R8000 would increase their pay to R10 000 to attract more people to work for them, and the employees who want to earn R12 500 will find that there are limited jobs in their field earning R12 500 therefore they would end up settling for a Job paying R10 000 (This is illustrated in figure 2.1.). In this example the point of compromise for both suppliers (employees) and demanders (employers demanding employees) is R10 000, this would be the market clearing wage. The problem in the real world is that this market clearing wage is not always sufficient enough to be considered a livable income and in some cases the actual wages employees get paid are below the market clearing wage which causes strikes from workers which in turn put a dent in South Africa’s economy.
Since many of the working class are not managing to maintain a living standard above the bare subsistence level the government thinks it can close the gap between the rich and the poor by raising the minimum amount of wages employees get paid so that they can have enough income to live comfortably, the government also hopes to decrease inequality and fight poverty by implementing a national minimum wage (NMW). In an ideal world this would work but in the real world there are implications to implementing a minimum wage which will be illustrated with the aid of figure 2.2.
As can be seen in figure 2.2. when a market is left to its own natural devices it reaches equilibrium at some point where quantity supplied is equal to quantity demanded(market clearing wage), in this case a quantity of 50 employees getting paid R10 000 in said market. If a minimum wage of R12 500 represented by the red line were to be implemented this would be a binding price floor which means it will cause changes in the market for jobs in a specific field. There would be an increase in the amount of people available for that job in the market (represented by the vertical black line at a quantity of 75) but there would be a decrease in the jobs available for those people (represented by the black line at a quantity of 25 jobs) as employers will no longer be able to afford employing as many workers due to wage increases. Employees would only keep their most essential workers and retrench the ones they cannot afford anymore. If government tries to help workers by implementing a NMW it might end up doing more harm than good as those who keep their jobs would earn more but others will be retrenched because of the decrease in demand due to increased wages. Due to a minimum wage that is above the equilibrium point (market clearing wage) the unemployment rate might actually increase, in the example in figure 2.2. The unemployment due to a price floor (minimum wage) would be Quantity supplied minus the Quantity demanded which is 75-25= 50. Since there is a minimum wage the market cannot reach the equivalence point which was the market clearing price.
South Africa currently does not have a national minimum wage but has sectoral minimum wages for areas in the economy considered to be vulnerable. Implementing a national minimum wage would be very difficult to determine as the different sectors have different elasticities to labour demand, this means there is varying responsiveness to labour price changes in the different sectors. A national minimum wage will help mostly unskilled workers as they fall under the vulnerable group who earn wages close to the poverty or below the poverty line if we consider the poverty line to be R2648 for the average household. The problem is that unskilled workers falling under the vulnerable category have a high elasticity of labour demand which means wage increases would mean they would have to be retrenched as they are replaceable as opposed to skilled health workers who have a low elasticity of labour demand going towards inelastic as they are a need hence employers cannot afford to lose them and would be forced to pay them the new wage. Therefore a minimum wage amount would have to be carefully thought out so as to not have a negative effect on the people it’s trying to help.
How South Africa can balance developmental goals and address unemployment
Having a national minimum wage that is too high can have a negative effect on the economy such as increasing the unemployment rate (caused by retrenchments due to minimum wage implementation), therefore in trying to reach the development goals the government should find a compromise whereby they set the minimum wage above the median wage and poverty line which are around the same amount R2600-R3000, as setting the minimum wage at this level would not solve the problem of people not earning a livable income. By setting a NMW there could be negative repercussions but evidence from other countries like the US, Brazil and the United Kingdom who implemented minimum wages shows that there was little to no change in employment due to implementation of minimum wages. The government needs to have the courage to take action for the people and find ways to deal with the consequences of implementing a national minimum wage because doing nothing is worse than trying and failing, whilst people are still earning apartheid wages unable to escape poverty.
Implementing a national minimum wage is necessary in order to try and help people get out of poverty and be able to live comfortably and not just survive. Yes, implementing a minimum wage might mean some people might lose their jobs but if the minimum wage is set at the right price people will not lose their jobs as is evidenced by results from other countries who have implemented minimum wages. It might be difficult to determine the price of the minimum wage as the different sectors have different elasticities of labour demand but whatever the final price is it should be above the poverty line and median price which is close to the poverty line at approximately.
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