Discuss the Pros and Cons of Minimum Wage from the Perspective of Firms, Consumers, Labour Force and the Government. Provide Recommendations

Introduction

There is an ongoing debate about whether or not a minimum wage in an economy has an overall positive or negative effect on the government, consumers, employees and employers. This report will focus on the effects of minimum wage using South Africa as an example. South Africa is a developing country that is currently on the cusp of implementing a National Minimum Wage (NMW).

After an overview of minimum wage and where Australia sits in the global spectrum, the report will discuss South Africa’s wage backdrop and the current changes occurring to create a NMW in the country. Understanding the potential positive and negative effects of implementing a NMW is a vital part in making a decision about whether it will have the desired result for the country. Finally, the report will discuss the added difficulty of implementing a minimum wage in a developing country compared to a developed country, due to country constraints and issues around policing a new policy.

Minimum wage overview

According to the Australian Government, minimum wage in the lowest amount a person can be paid for their time, they cannot be paid less than this amount even if they are happy to. Minimum wage in Australia is determined by the Fair Work Commission’s panel who review the wages earned nationally and make a decision based on a number of inputs and submissions. The current minimum wage in Australia has just been moved up to $18.93 per hour and $719.20 for a 38-hour week, this will take place on the 31st July 2018 (Govenrment, 2018).

As illustrated by Figure 1 below, Australia has the highest minimum wage shown in US dollars compared with any other part of the world.

Figure 1: Graph shows US dollars per hour after taxes

Source: (Myers, 2016)

In economic terms, minimum wage can be described as a price floor where this legal minimum is set by the government. The purpose of this is to ensure workers, especially unskilled workers who are the main receivers of the minimum wage, receive a wage that elevates them out of poverty and redistributes income to lower paid workers.

Minimum wage can create a surplus in the number of job seekers in the market, as illustrated in Figure 2. At the labour supply and demand equilibrium, the number of people looking for jobs equals the number of jobs available. By adding the price floor, it can be seen that the supply of workers becomes greater than the demand for workers. In the example below, by introducing a minimum wage of $5 / hour, if the equilibrium level remains unchanged, then there will be an increase in unemployment in the labour market which is the difference between 32,000 and 50,000. This means that the marginal benefit of each individual employed needs to be larger than the minimum wage to justify that workers employment. The obvious negative effects of this is that employers have an increased incentive to ‘make do with less’.

Figure 2: Labour Supply and Demand

Source: (Cooper & John, 2011)

The question around whether the introduction of a minimum wage will support an increase in employment or will result in jobs being lost depends on each workers marginal product of labour (MPL). If the income is changed to be a lot lower than the MPL of a worker, which would be the case in a monopolistic firm, then workers would be the beneficiaries of wage increases with no job losses, because even with the higher wage, the company will still make enough per worker to cover the wages (Rebitzer & Taylor, 1995). But if it is a competitive market, which is the more common scenario, when wages equal the MPL, if these wages are increased the result could be job losses (Rebitzer & Taylor, 1995).

Minimum Wage in South Africa

The wage conversation in South Africa is not a new one. There is immense income inequality in South Africa and coupled with high unemployment and weak economic growth, this can lead to low job growth. The discussion with regards to minimum wage in South Africa is largely linked to the redistribution of wealth as there is such a high disconnect between the poor and the rich in the country. South Africa, even compared to other developing countries, has an increased disparity in income due to the gap within social groups as well (World Bank Group, 2016).

Historically South Africa has a more informal format for minimum wage that was decided based on sector. For the sectors with strong trade unions (e.g. metal manufacturing) there were ‘bargaining councils’ set up, which included a discussion around an agreed minimum wage, but in sectors without strong unions (e.g. domestic workers) the minimum wages were set by the minister of Labour based on recommendations (Seekings & Nattrass, 2017). These minimums were lower than half of the proposed new NMW and were poorly policed, leaving workers exposed to being exploited.

In 2015 the Government of South Africa agreed, in principal, to set a NMW for the country but with no specific level agreed. Over the last 3 years they have come to a decision to set a minimum wage of R20 (~AUD 2) per hour in the main industries, farm workers at R18 (~AUD 1.8) and domestic workers at R15 (~AUD 1.5) per hour (JobMail, 2018). This was due to be formally implemented on May 1 2018 but has been delayed, with the current status being that further negotiations are being carried out to formalize the minimum wage. This will result in an increase in salaries for six million workers in South Africa, with the purpose of lifting them out of poverty (JobMail, 2018).

There is ongoing contention over whether or not this will help or harm the economy and current very weak labour market. The International Labour Organisation (ILO) focuses on different factors to be considered when making decisions on the level that the NMW should be set at. Two of these are the needs of workers and their families and the economic factors (International Labour Organization, 2018). There is unease in South Africa around the level chosen for the NMW as if it is too high the implementation could negatively affect the labour market, potentially leading to greater unemployment.

When making an argument against this potential negative affect to the labour market researchers have drawn a comparison to Brazil, a similar developing country, as they have shown that the minimum can be increased substantially without having negative effects. The Brazilian NMW was doubled between 2003 and 2012