Minimum Wage: A Standing Obstacle to Job Creation

The National Minimum Wage Act was signed into law by President Ramaphosa in 2018, the introductory minimum wage being set at R20,00 per hour. As required by the Act, the national minimum wage is set for review every year and, upon advice and recommendations from the National Minimum Wage Commission, the national minimum wage (NMW) is adjusted – it has only ever been increased – annually by the Minister of Employment & Labour, presently– Mr Thulas Nxesi. As of March 2022, the NMW is R23,19 per hour.

What exactly is the NMW? The NMW is the minimum of amount of money a South African can earn per ‘every ordinary hour worked’. Thus, the Act prohibits paying the average South African worker less than R23,19 for an hour’s work.

The NMW sets a basic level of income for every South African. What’s so bad about that? On the face of it, the NMW appears to promise to protect workers from being paid unfair wages, and to improve the wages of the country’s lowest-paid workers. That’s all well and rosy, but what proponents of the NMW often overlook is that the effects of implementing it contradict the intention of setting a minimum wage and put the poor in even deeper trouble.

By implementing an NMW, the government is effectively raising the cost of employing someone – this is not good for business and is consequently not good for the employees either, or those seeking employment in the future. Minimum wage law has the effect of pricing low-skilled and/or inexperienced individuals out of a job. If the skillset you possess is not worth the entry-level R23,19 per hour then it will be impossible for you to find work. Basically, the NMW has the effect of ensuring that all low-skilled individuals won’t be able to find work, as they are too expensive to hire due to their lack of experience and skills. It is not hard to realise that the low-skilled citizens of our country are most commonly the poor. The NMW has the effect of leaving those poor people even poorer, as finding work for them will now be more difficult. Famed economist Milton Friedman pointed out that minimum wage law had the effect of saying “employers must discriminate against people who have low skills”.

Those earning the NMW themselves are in a weak position as the more the NMW increases, so does the threat of retrenchment. Businesses may not be able to afford to employ a large number of staff because of the standards set by the NMW. Businesses will also continue to find other means of generating a low-cost workforce. Businesses may turn to mechanization and artificial intelligence technology instead of employing people. Alternatively, improper though it may be, businesses may be tempted to take on undocumented workers, who are obviously exempted from the NMW. All of this has the effect of leaving more and more South Africans jobless. Ultimately, a business will (and has to) do what is best for business.

As financial commentator Philsande Shongwe once wrote, “The real minimum wage is R0,00.” Throughout history, minimum wage law has always had the effect of driving up unemployment. The irony is that the NMW aggravates the problem of poverty which it intends to ameliorate. Putting young and low-skilled people out of jobs is surely undesirable and so the NMW should be removed. It is yet another policy interference in the working of businesses which provide the jobs South Africans seek.

The NMW will continue to rise because of inflation and the effect of the Covid-19 pandemic. This continued rise will threaten the jobs of those already earning the NMW; continue to price young and unskilled labourers out of work; and also deter businesses, new and old, from taking on a significant workforce. A steadily rising NMW will also deter the creation of new businesses, as one of the main costs of operating a business is employee salaries. Investors might take their business elsewhere, and entrepreneurs will be deterred from starting their own business.

Without businesses, unemployment will continue to grow. Government must get out of the way of business and remove harmful obstacles like the NMW. The growth of the economy will follow, putting more people in jobs and out of poverty. Without the NMW, more South Africans would gain their freedom to earn.

Cover image source available here.