Economics - Minimum Wage free essay sample

South Africa’s history is riddled with economic exploitation and government has continually tried to right the socio-economic wrongs of the past, through the use of various economic policies and labour legislation. One such legislation has been highly debated in recent months. The legislation in question governs the minimum labour wage for each of the respective economic sectors. According to Burda and Wyplosz (2013:124) â€Å"Minimum wages are the legal limits on how low wages can be. † In this essay the advantages and disadvantages of minimum wages will be discussed, with the South African agricultural sector as a case study. Burda and Wyplosz (2013:124). Illustrated above is the effect minimum wages have on the labour market. To be of any worth it is essential that the minimum wage Wmin is set above the wage that would be gained in another way (w), and which is higher than the wage set at market equilibrium that the individual would of accepted. The consequence is an employment level equal to Lmin; and unemployment level equal to (Lsmin – Lmin), which is greater than the level of unemployment in a state of collective bargaining (Burda and Wyplosz, 2013:124). Firms may choose not to lower the real wage rage as a counter measure to rising unemployment; this occurrence is called an efficiency wage. Firms may opt to pay higher wages in an attempt to increase the level of output and quality by workers, as well as to attract better job applicants (Burda and Wyplosz, 2013:124). Government sets the minimum wage level whereas an efficiency wage is determined and set by firms themselves. There are many advantages and disadvantages of implementing minimum wage legislation. Two of the main advantages are the following: firstly economic growth is motivated through the discouragement of labour-intensive industries (Burda and Wyplosz, 2013:124). Secondly minimum wages also reduce the amount of dependency on government by minimum-wage employees, which could lead to a decrease in tax, because less people now rely on social grants to survive. Ultimately the minimum wage aims to protect workers from exploitation. On the other hand the disadvantages of minimum wages have to be studied more closely. Minimum wages can result in an increase in the unemployment of unskilled workers as well as raise employment barriers. The demand for labour is directly affected by the minimum wage legislation; as a result there is an increase in the unemployment level of the unskilled labour force because of an increase in the minimum wage. The unskilled labour force is ultimately the group of people, the minimum wage aims to protect. Due to minimum wage increases, firms starts to invest more in capital and less in labour. This increase in capital investment means that firms spend money on expensive equipment instead of labour because it is seen as a better long-term investment. The investment in technologically advanced equipment also means that firms now have to employ skilled workers to operate the equipment, which ultimately also increases the cost of production. As a result the prices of goods increase, which causes an increase in the CPI (consumer price index), which is reflected as an increase in inflation (News 24, 2013). This increase in inflation contradicts what government intended the minimum wages to do, which is raise the standard of living of South Africa’s unemployed and blue collar workers. South African farmers in the wake of recent strikes and the raising of the minimum wage to R105 a day have started looking at options to replace labour (Cohen, 2013). The implementation of minimum wages has a direct effect on productivity, because it affects the price of the products produced for the consumer. The reason why price is crucial to productivity is because an increase in price results in a decrease in demand for that specific product because of substitution for a similar product. This decrease in demand for goods and services means that suppliers now have to reduce the quantity they produce thus decreasing productivity, and ultimately leading to the retrenchment of employees. It is believed that jobs losses in the agricultural sector could possibly grow to 200 000, despite the agricultural sector being seen as a crucial job creator (News 24, 2013). The rate of technological development in recent years means that machines are consistently becoming cheaper and more commercially available to all businesses. The volatility and inconsistency of South African labour laws, means that it has become more commercially sustainable to invest in capital whilst reducing investment in labour. This means that employers would rather purchase machinery instead of having to battle South Africa’s labour laws, in their bid to be an economically sustainable business. It has been reported that in the wake of the recent farmworker strikes, many farmers will be mechanising their operations or will be switching to less labour-intensive goods (Cohen, 2013). As a developing country South Africa must always look to be internationally competitive. The South African economy relies heavily on the export of agricultural products to developed countries. Therefore the consistent increase in minimum wages seriously endangers the employment of those workers who work in the agricultural sector. The agricultural sector employs many people and is a crucial job creator. But higher minimum wages means that South Africa is in danger of not being able to compete with countries on the international market. In order to ensure sustainable economic growth and job creation. Low inflation levels and financial confidence are needed. The increase in the cost of production as a result of an increase in the minimum wage level, directly affects the CPI and consequently inflation (News 24, 2013). Therefore a resultant increase in inflation because of an increase in production costs is not in anyway beneficial to long-term sustainable economic growth. When trade unions demand higher wages they more often then not fail to take into consideration non-wage compensation. These non-wage compensations often include things such as, free housing, transport and medical aid. In an attempt to counter increasing production costs as a result of increases in minimum wages, firms reduce the amount of non-wage compensation given to their employees. So essentially the workers are not better off. There is a common belief that the implementation of minimum wages stops the occurrence of wage discrimination. Unfortunately this is not always true, because as mentioned above minimum wages cause an increase in unemployment. This increase in unemployment as seen in the previously listed graph, means that there is an increase in the availability of unskilled labour (Burda and Wyplosz, 2013:124). Therefore firms are more likely to take advantage of the excess of unskilled workers, by employing workers below the minimum wage. In conclusion it can be said that minimum wage legislation is far from perfect, and despite its good intentions, it more often then not causes more damage than good. The South African government through its various social grants and unproductive labour laws have created a lazy society who is dependant on â€Å"free hand-outs†. It has become acceptable to try and improve your social position through violence instead of hard work. The minimum wage legislation in South Africa aims to treat the symptoms of a largely unskilled labour force and social inequality. By treating the symptoms, the causes of the social inequality and largely unskilled labour force are not addressed. By consistently increasing the monetary value of an unskilled worker, government indirectly decreases the monetary value of skilled workers. This situation takes the away the incentive for workers, to try improve their level of skill. Government must realise that the only way to decrease social inequality and increase employment, is to fight these problem at a grass roots level. Government should rather focus on improving education in order to raise the skills level of the entire labour force. Government should also make changes to the current labour laws, so that greater emphasis is based on the implementation of incentive/efficiency wages. Efficiency wages are more likely to improve unemployment and increase production, because firms are willing to pay more, if their production increases. In the end sadly the unemployed in South Africa are exploited through false promises in order to gain political favour. List Of References BURDA, M and WYPLOSZ, C, 2013. Macroeconomics: A European Text (6ed). Oxford: Oxford University Press. COHEN, M, 2013. South Africa Raises Farmworkers’ Minimum Wage In Wake Of Strikes. Bloomberg. [Online]. Available: http://www. bloomberg. com/news/2013-02-04/south-africa-raises-farmworkers-minimum-wage-in-wake-of-strikes. html. [Accessed 10 April 2013]. NEWS 24,2013. Farm Job Cuts Could Grow To 200000. Fin 24. [Online]. Available: http://www. fin24. com/Economy/Farms-job-cuts-could-grow-to-200-000-20130210. [Accessed 10 April 2013]. NEWS 24,2013. Farm Minimum Wage A Double-Edged Sword. Fin 24. [Online]. Available: http://www. fin24. com/Economy/Farm-minimum-wage-a-double-edged-sword-20130204. [Accessed 10 April 2013]. NEWS 24,2013. Price Hikes ‘Threaten’ Food Security. Fin 24. [Online]. Available: http://www. fin24. com/Economy/Price-hikes-threaten-food-security-20130301. [Accessed 10 April 2013]. NEWS 24,2013. Rand Edges Lower On CPI Data. Fin 24. [Online]. Available: