National minimum wage: Caution required

There are conflicting views on the subject and given our uncertain economic circumstances it seems pointless for the government to interfere with the current system of regulating minimum wages in various sectors.

Concerned about youth unemployment, the government faced down union opposition and introduced a special youth wage subsidy because it believed current wage levels prevent young workers from getting their first jobs. The government should proceed with caution. Current legislation already provides for increased minimum wages in all sectors if the government believes this can be done without job losses. If, however, there are concerns about job losses, the law grants the government the flexibility to raise wages more gradually in vulnerable sectors to test the effect on employment levels.

Extract from Gavin Keeton’s article National minimum wage can cause job losses which first appeared yesterday in BDlive published by Business Day.

Further excerpts

SA already has minimum wages that differ by sector and region. Thus minimum wages for domestic and farm workers are lower than in manufacturing.

Workers in rural areas are paid less than those living in cities.

Logically, a single national minimum wage will have to at least match the current highest sectoral minimum wage. It will be unacceptable to cut the minimum in the higher-paying sectors. This means minimum wages in the lowest-paying sectors could more than double.

Those who support a national minimum wage argue it will reduce inequality. This is true only if employment is unaffected. If employers cut jobs because they must pay more than they can afford, inequality may worsen. Benefits for those on the new minimum wage will come at the cost of lost jobs for others.

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GilesFiles on January 12, 2016 at 11:57 am

Letter to BDlive published by Business Day today: Minimum wage economists are building pie-in-the-sky models

OVER the past six months I have read several opinion pieces in Business Day on the institution of a minimum wage in SA. The fact is, we already have minimum wages set for each industrial sector by bargaining councils.

The recent article by Gilad Isaacs (Minimum wage’s maximum gains, January 11) makes me wonder if any of these economists ever spent any time running a real business or have the knowledge of how a business income model works. The basic simplified business model of income less expenses equals profit applies in deciding what will happen if minimum wages increase.

In my small business, I expect my profit and return on investment to exceed at least the 7.5% I could get if I invested in risk-free retail bonds (and sat drinking beer on the veranda every day). Preferably, am looking at least a premium of 5% above the risk-free return of 7.5%, which means I expect a minimum return of 12.5% to cover my risk and entrepreneurial effort.

Wages are the biggest portion of my cost structure, so if minimum wages increase it will be necessary to increase selling prices of our products to maintain the level of net profit to ensure a fair rate of return on investment. This in itself will affect inflation, and in our present policy environment lead to higher interest rates eventually.

The problem, however, is that in recessionary times (or low growth times), you cannot just increase selling prices indiscriminately as there is price sensitivity (inelasticity), which can lead to a reduction in customers. So in most cases the solution would be to freeze your wage bill. If your monthly wage bill for 21 employees is R97,000 a month (average R4,619.05; the minimum wage in our industry is currently R2,760) and the minimum wage increases to R5,500 per month, you will need to reduce your staff complement from 21 to 17 to maintain your net income.

Normally one would carry part of the increase, but with 30% of our direct cost being imported goods we expect major price increases this year, which will also affect the business model and compete with wages in this basic business model. Should my return on investment fall below 7.5%, the decision becomes to disinvest (sell or liquidate), resulting in 21 people being unemployed.

The “minimum wage’s maximum gains” model can only work in a high growth economy, where you can increase your selling prices on the cost-plus pricing model (or indiscriminately).

My suggestion is that researchers and some economists get out of their offices and talk to managers and owners on the shop floor before building “pie in the sky” models.

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National minimum wage: Caution required

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