Before I dive into the discussion of minimum wage laws and their undesirable effects, I feel compelled to address the topic of profits. I choose to start here because it is a common point of contention when I explain why minimum wage laws are flawed policy. Why is there such demonization of profits? Why do we criticize companies for seeking to make a profit? Is it wrong to reward someone for their hard work? Many of you would not be using smartphones if it weren’t for the incentive of profit. And let’s not overlook the years you spent educating yourself with the goal of earning money. You didn’t attend university, assuming you did, solely for the love of education. You went there with self-interest in mind, aiming for a well-paying job to make ends meet. That same self-interest that motivates you is what drives entrepreneurs to take risks and start businesses. Furthermore, who among us is not motivated by self-interest? You? If you think so, you are clearly not thinking.
Another interesting point on this topic is our trust in politicians to combat the so-called greedy capitalists who seek profit. When I see this, I can’t help but laugh. Do you really believe politicians are not driven by their own self-interests? Do you think they don’t say whatever it takes, no matter how ridiculous, to gain votes? What if, in politics, votes are the equivalent of profit in business? I hear politicians on TV discussing their plans to expand their political parties’ presence in certain regions. Isn’t that a “capitalist” way of thinking? Isn’t that what executive committees in business discuss when they talk about expanding their business presence in various regions or countries? The common denominator here is self-interest. Everyone is motivated by self-interest, including myself. Self-interest is not inherently bad.
Also, the capitalist system is one of profit AND losses. It’s curious to me that we vilify capitalism by focusing only on one aspect and ignoring the other. But that’s a topic for another day; let me set it aside and return to the minimum wage.
“By the simplest and most basic economics, a price artificially raised tends to cause more to be supplied and less to be demanded than when prices are left to be determined by supply and demand in the free market.” – Thomas Sowell, Basic Economics. The principle outlined above is the foundation of my argument against the minimum wage. The truth is that the real minimum wage is zero, regardless of the artificial level set by the government. Moreover, the establishment of a minimum wage is based on a fatal assumption: it presumes that employers are mere pieces that can be moved around at will. In reality, when people find laws unfavorable, they almost always seek ways to circumvent them. The same is true for employers; they will not necessarily comply with the mandated minimum wage just because the law dictates it. They are not mindless sheep following a shepherd. When the government issues a law, people will react, and how they react is outside the control of the government. Someone may argue that the government has the power to enforce the law. Okay, sunshine, enforcing laws comes at an economic price. You must hire and pay people to enforce that law. Does the government have money for that? And at what cost does that enforcement come? Is it not funds redirected from education, public health, infrastructure, etc.?
This is evident in South Africa. Employers often prefer to hire foreign workers over South Africans to avoid or circumvent restrictive laws such as minimum wage legislation. These employers are intelligent individuals who contribute value to the economy, as such, some of them are savvy enough to do this within the confines of the law. They don’t necessarily have to hire undocumented foreigners; with remote working, they can simply employ people in other countries to work remotely. Since these workers are not South African, they are not bound by South African laws but by the laws of their own countries. All these maneuvers are carried out at the expense of unemployed South Africans.
Another aspect overlooked by proponents of minimum wage laws is the importance of value in determining wages. Wages are not thumb sucked figures; they are driven by value. Employers assess the value of their employees and negotiate salaries accordingly. For example, if the value you bring to an employer is perceived to be less than the minimum wage, you will be deemed too expensive and not hired. Similarly, if you enter a retail store and perceive the value of a product to be less than its price, you will not purchase it. So why do people lose this common sense when it comes to wages? Why do they consider wages in isolation? Where is the element of value in their argument?
As I’ve already indicated, employers are driven by profit. Ultimately, they must make a profit, which is the whole point of starting a business. Therefore, the value that employees bring to their companies must exceed their economic cost for these companies to turn a profit and create value. If your economic value as an employee is less than your wage, no astute businessperson would hire you, regardless of what the government says. Hiring you would contravene the basic principles of business.
I have already spoken about value, which is also influenced by qualifications and experience. For instance, if you only have a matric, your services are worth less than those of someone with a degree in a specific field, especially if that field is highly valued in the economy. Now, when we set minimum wages, we are essentially fixing a price for all employees in the economy, regardless of their qualifications and experience. Imagine, as an employer, you hire a matriculant with a 30% in math and no experience, yet you are expected to pay them, say, R70 per hour. That amounts to R11,200 per month. Now the question is, as a shrewd businessman, are the services provided by this person worth R11,200? Clearly not! As such, you would not even consider hiring them. What then happens to this matriculant? Yes, they become part of the unemployed youth, and it becomes difficult for them to escape that status. It could even be argued that as long as the minimum wage is in force, they are unemployable.
To be continued…Be on the lookout for Part II.