Minimum wage in an era of joblessness - Financial Mail

Jun 02, 2022
2 June 2022 - Every opinion poll commissioned by the Institute of Race Relations (IRR) indicates that unemployment is the No 1 problem in SA.

Gabriel Crouse

Every opinion poll commissioned by the Institute of Race Relations (IRR) indicates that unemployment is the No 1 problem in SA.

With social distancing, the unemployment line could reach from Cape Town to St Petersburg. But on an IRR estimate, it could reach as far as the North Pole soon, if urgent change isn’t made.

In 2019, we warned that 1.7-million jobs would be lost in SA due to two factors. The first was research by Yale economist Jim Henry on jobs “at risk” of replacement; the second was our research into our new national minimum wage (NMW).

Some libertarians argue that a minimum wage increases unemployment, no matter what. They provide no evidence for this, which isn’t helpful. 

Nor is it accurate. To solve the biggest problem in the country, one must check the facts. And surprising evidence has come in which supports the idea of a minimum wage. 

Nobel laureate Paul Krugman was firmly against a minimum wage until he saw studies which argued in favour of it, the first from fellow Princeton professor Alan Krueger.

David Card, another Nobel laureate trained at Princeton, went the furthest in countering libertarian (and socialist) presumptions about the minimum wage with empirical inquiry, all of which is readily available. 

The fact is that the evidence does not support a totalitarian view for or against the minimum wage.

Rather, it recommends a goldilocks compromise between an NMW and a median wage (MW), the level at which half of all workers earn more and half earn less.

The ideal NMW-MW ratio is up for debate, but the clear warning is that there is a “too hot” option.

In the US, the debate is about whether to raise the NMW from about 25% of the median to 50%. Krugman thinks this is low enough generally, but also argues that the economy of a poor region such as Puerto Rico “is hurt by sharing the US minimum wage”, because the NMW-MW ratio there is already 70%.

The US Congressional Budget Office, a government statistics body, estimates 1.3-million people will lose their jobs if the US NMW-MW ratio is doubled to 50%, and that 1.3-million other workers will climb out of poverty. So this highlights what’s at stake. The pandemic, lockdown and sudden contraction in economic growth accelerated mass job-shedding from years to months

In SA, our NMW-MW ratio has been about 100% since 2019, which is practically a world record. The NMW is now R23.19 and the MW is R24.06 per hour, meaning the NMW-MW ratio is 96%.

That puts half the workforce in peril.

When we warned in 2019 that 1.7-million jobs would be lost due to this dumbfounding NMW-MW ratio, we were incorrect on one front: time.

We always expected the stagnant economy to slow the process of replacing labour with machines, but the pandemic, lockdown and sudden contraction in economic growth accelerated mass job-shedding from years to months.

Since Covid, some peer countries have regained their job losses. But in SA, we remain 1.5-million jobs behind, and the proportion of youth not in employment, education or training continued to rise in the past quarter.

 Given the world-record NMW-MW unemployment ratio, this horror is no surprise.

Youth bearing the brunt

Unfortunately, SA’s youth are suffering under the kind of policy you would expect from a warm-hearted billionaire who does nice-sounding but ineffective things. Red tape is garrotting our young jobseekers.

The IRR calculates that 56% of South Africans aged 24 to 34 are not in employment, education or training.

But if labour minister Thulas Nxesi gets his big wish — implementation of the Employment Equity Amendment Bill — we can expect the expanded definition of unemployment (including those who have stopped looking for jobs) to climb towards 56% for everyone. 

That bill sounds pro-poor, but it’s actually the opposite. It grants Nxesi the power to set race quotas across the private sector, which can be enforced by pre-qualification for tenders and multimillion-rand fines.  

Unless much of this is rethought, Nxesi may as well celebrate June 16 by announcing: “Happy Youth Day — most of you will never get a job!”

The point is, it doesn’t have to be this way: 1.9-million jobs were added between 2003 and 2008, so we know what it takes to do that again.

The way we see it, the first solution is to drop the minimum wage to the government rate of R12.75 per hour.

After that, there is more that could be done. In a 2020 IRR survey, 80% of black respondents said they would benefit more from scrapping BEE and implementing a voucher system for various things, including education. That would work too.

* Crouse is an analyst at the IRR

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