We need evidence-based and not sentiment-based decisions regarding minimum wages.
The debate about minimum wages rages on with maximum political point scoring and minimum thought going into it. Minimum wages are a bad way to combat poverty. Someone must pay and that cost is normally passed on to the consumer and falls heavily on the poor. Companies shoulder the burden of payment and they immediately turn their minds as to how to mechanise the jobs. Some jobs will be lost for ever, never to be seen again.
The Economist, in the last week of July 2015, covered the minimum wages debate in some detail, and the heading of that article was “A reckless wager”. A global movement toward much higher minimum wages is dangerous. When prices rise, demand falls. Big increases in minimum wages are a gamble with workers’ futures. Modest minimum wages, on the other hand, do not pose a risk. To set the record straight, I fully support minimum wages that are sustainable and do not lead to job loss. My view has always been that I would rather have a job with all employed, even if it means earning a bit less, rather than fewer of us having highly paid jobs. The reason for my thinking is that having a job gives me self-esteem, and I can feed my family.
Advantages of minimum wages
Exploitation of workers and slave wage levels become illegal and are alleviated. A minimum wage may even boost productivity and strengthen the retention aspect of the employee value proposition, but it makes it harder for employees to leave their employ. Politicians buy more votes, but only until retrenchments hit the scene.
Disadvantages of minimum wages
One danger is that a high minimum wage will push some workers out of the labour force for good. It’s possible that a building worker who loses his job in a recession can expect to find work when the economy picks up, but a cashier with few skills who, following the introduction of a high minimum wage becomes permanently more expensive than a self-service checkout machine, will have no such luck. Renowned economist, Milton Friedman, described minimum wages as a form of discrimination against the low-skilled. So our pickers, packers, stackers are all vulnerable. Some companies will go bankrupt and in turn Government will earn less tax revenue.
Lessons learnt from other countries
Indeed, many countries have implemented minimum wage policies. The results are mixed and the evidence is inconclusive. What we do know, though, is if it is done modestly it does not destroy jobs. We need to find our own definition of “modestly” and let that inform policy. I think the definition could be industry or company specific. We are all in a different place financially. Perhaps we should consider a compulsory 10% net profit sharing principle that goes equally to all employees. That is, 10% of net profit goes into a bonus pool for equal sharing throughout the company.
In the same edition of The Economist, another article entitled “Free exchange – destination unknown”, there are further examples of international minimum wages. The trend seems to be to set the minimum wage as a function of the median earnings for the lowest level or category of staff. For example, if the median were 3,000 per month, the minimum wage would be a percentage of that, for example 75%, making the minimum wage 2,250.
The Economist suggests that better tools are available to solve the problem. Tax credits, (income top ups for the poor) are a much more efficient way to help the poor. About three quarters of the benefit ends up with employees. To the extent that firms benefit, they employ low-skilled workers rather than automate jobs. One could consider various tax structuring including VAT to help the poorest of the poor. If we don’t, the hardest hit will be the under 25 years of age with no degree. They are young, could be gifted, and are fired.
A mandatory wealth sharing mechanism needs to be designed for SA Inc. Love them or hate them, the Singaporeans all bit hard for the first few years of their transformation, but it has now paid off. Singapore is probably the most inclusive country I have ever been too. It doesn’t matter whether your origin is Chinese, Malaysian, Indonesian, Indian or if you are Caucasian – everyone feels included. We need to embrace this concept quickly.
This is the worst time to be considering raising the cost of workers. Technological advances are enabling companies to replace more and more people with machines and robots. Our skill levels are disastrously low and this has created a scenario where we have the greatest job mismatch of all time: thousands of vacancies and “no-one” skilled enough to fill them. A friend of mine working in a government hospital told me that three anaesthetists emigrated because they couldn’t find permanent appointments in a government hospital – where there are hundreds of vacancies! This practice has got to stop. People are suffering and we need to use more common sense. I know we have it.
The Economist suggests that, by moving towards sharply higher minimum wages, policymakers are accelerating into a fog. Little is known about the long term effects. And nobody knows what big rises will do, at any stage in the future. It is reckless to assume that because low minimum wages are harmless, much higher ones must be too.
We are still not out of the global financial woes and many of our companies are against the ropes. We need policies that will stimulate employment and growth. That way companies grow, employ people and can pay higher wages. Government can collect more taxes and infrastructure development can create more jobs. We all win.
In South Africa, the Government is walking a policy tight rope between trying to stimulate the economy with progressive market friendly policies and not creating a vacuum for radical left wing political parties to fill. Minimum wages have powerful emotional and political appeal. But governments should make evidence-based decisions, and not sentiment-based decisions. Minimum wages can work as part of the policy mix only if they are sustainable. Set too high, they can harm the very people they were designed to help. Bold political leadership is required and we must stick to our song – jobs for all. Please.
Dr Mark Bussin is the Executive Chairperson at 21st Century Pay Solutions Group, www.21century.co.za, a Professor at University of Johannesburg, Professor Extraordinaire at North West University, Chairperson and member of various boards and remuneration committees, immediate past President and EXCO member of South African Reward Association, and a former Commissioner in the Office of the Presidency.
This article appeared in the October 2015 issue of HR Future magazine.