The flaw in the minimum wage debate

27 July 2016

Cape Town - The minimum wage debate has again erupted with the release this week of a University of Witwatersrand (Wits) report that suggests a minimum wage for the country of between  R4 500 and R5 000.

Unions, civil society organisations, business and government at the National Development Economic and Labour Council (Nedlac) in June seemed to be moving toward an agreed minimum of between R3 000 and R3 700, although Cosatu was holding out for R4 500.

The latest suggestion from the Wits report maintains that the higher basic wage would provide an impetus to the local economy and boost South Africa’s gross domestic product (GDP) by more than 2%.

What this, in fact, reveals, is the danger of regarding elements of the economy in isolation.

Quick off the condemnatory mark were business interests and mainstream economists who pointed out that a massive leap in the minimum wage would result in major job losses - that an employer of, for example, a domestic worker, could not afford what would be an effective 100% pay rise.

But the major flaw in the argument made in the Wits report and backed by academics from the United States, is that a substantial minimum wage would be to the benefit of the national economy. It would be, but only if most of the consumer spend was on locally produced products. It is not and, in the current conditions, cannot be.

The country’s GDP, along with the bottom lines of importers, wholesalers and retailers would certainly benefit by increased consumer spending, and this would boost the GDP. But, at the same time, in the present conditions, it would add to South Africa’s debt and foreign exchange woes.

Low paid workers, earning more, will certainly spend more. But the spend would be on goods that are, for the most part, imported. Price will still remain the determining factor in consumer behaviour.

So to continue to look at a minimum wage in almost total isolation is foolish, yet totally in line with the ad hoc, knee jerk policies that have been pursued so far — and with general disastrous consequences.

This article first appeared on Fin24, see here.