Minimum wage won’t save South Africa

By Nicholas Woode-Smith, an author, economic historian and political analyst, is a contributing author for the Free Market Foundation.By Nicholas Woode-Smith, an author, economic historian and political analyst, is a contributing author for the Free Market Foundation.

A new minimum wage is set to be discussed later this year, to be implemented in March 2023. While it may seem both compassionate and logical to explore an increased minimum wage for South African workers, the truth is that it would be far better to abolish the minimum wage than to increase it.

2022 has seen a record rise in the cost of living. Fuel prices are rising every month. Electricity prices rise while the lights stay off. And the price of food and essentials skyrocket across the board. With all that in mind, it seems reasonable to raise the minimum wage. If costs are rising, minimum wage workers need to be able to afford the new expenses, right?

But the minimum wage isn’t some universal fix-all for South Africa’s ills. As of the first quarter of 2022, unemployment in SA was sitting at 34.5%. This is a conservative estimate, disregarding those who have given up on finding employment. Even with this conservative estimate, one in three people is unemployed.

The minimum wage doesn’t help you if you don’t have a job. In truth, a higher minimum wage just raises the expense per a worker for the employer. The more that an employer has to pay an employee, the fewer employees they can hire. Additionally, if the minimum wage rises above the value that a worker actually produces, they lose their job. As there is no point employing someone who ‘produces’ a loss for the business.

The minimum wage doesn’t help the unemployed. If anything, it contributes towards unemployment.

Above that, general wage rises are almost always accompanied by rising prices. A minimum wage increase will pass on extra expenses to the employer, who will have to pass those expenses on to the consumer. That means that the increasingly rising cost of living will rise even more.

Any increase a minimum wage worker receives is soon nullified by inflation. Trying to raise the minimum wage above inflation doesn’t really solve matters, as prices will be pushed up by the rising minimum wage; a terrible cycle.

Even if some workers do benefit from the minimum wage rising, the majority will soon be hit from all sides by rapidly rising prices. Those who haven’t received a pay rise because they earn above minimum wage, or are unemployed, will be given no increase to deal with rising costs.

Many businesses, especially small ones, have tight margins. An increased minimum wage may very well push them overboard, and lead to the business going bankrupt and all its existing employees becoming unemployed.

South Africa already has a minimum wage. It being too small or large is irrelevant. What is relevant is that many businesses are still not compliant with the law, and that many workers are willing to work for below minimum wage, because a low-paying job is better than no job. And many businesses can’t survive if they were to pay their workers more.

The fact that there is such a huge xenophobia problem in SA is partly because there is a perception that foreign workers are undercutting South Africans by working for less than minimum wage. Perhaps then, the solution is to abolish said minimum wage.

The fact of the matter is that the minimum wage law is, in reality, unimplementable in South Africa. People need jobs and will work for whatever they can get so they can survive. A privileged legislator cannot reasonably set such a blatant restriction on employment.

It is clear that the minimum wage should not be raised. It will lead to increased unemployment, rising cost of living, failing small businesses and further economic decline.

Then what is the solution? How can we create more, higher paying and fulfilling jobs?

SA needs to grow its economy if it is to produce more and better jobs. That means cutting red tape. Rather than raising the minimum wage, abolish it. Recognise that the true minimum wage is what an individual is willing to work for and an employer is willing to pay.

Couple that with deregulating the labour market, removing Eskom’s monopoly, cutting tax and spending, and generally embracing a free market, and South Africa won’t need a minimum wage. Businesses will have to compete for decent workers, and there will be jobs for anyone willing to work.

All it takes is the state cutting red tape and stepping away so business and individuals can make the rational choices that will lead to a better future.