Impact of Minimum Wages on Employment

INTRODUCTION

The impact of wages on the level of employment or unemployment is an intense issue across the world. This issue has recently been further amplified in South Africa because of the recent farm and mine worker wage increases; this paper seeks to examine the various positive and negative effects brought about by the minimum wage institution.

DEMERITS OF RAISING MINIMUM WAGES

The principle behind the minimum wage institution is that it assists those who are at the base of the income distribution to be able to fulfil their basic needs and enjoy an acceptable standard of living; in essence the wage floor is implemented in order to mitigate the level of poverty (Foguel & Ramos, 2001: 1). The imposition of minimum wages may end up having a perverse effect on the original goal through its effects on the workings of the labour market (Foguel & Ramos, 2001: 1).

The above mentioned effect is illustrated when emerging farmers were not able to afford the farmworkers minimum wage increase from R69 to R105 imposed by the department of labour; the wage increase resulted in developing farmers having no other alternative but to reduce their workforce (The Africa Report, 2013: 1). The diagram below illustrates the effect an increase in minimum wages has on a competitive labour market:

Real wage rate labour supply

Wmin A C

B

Wc

LS>LD

Labour Demand

Lmin L’ L Employment

[Derived from Froyen (2005, 292)]

In the above diagram labour unions have caused an increase in the wage rate above equilibrium through violent strikes, labour market equilibrium occurs at point B and the real wage rate is increased to Wmin. The new wage rate is set above equilibrium resulting in an excess of labour supply (distance A C), labour demand is falls from L’ to Lmin. The higher the value of the minimum wage, the higher the level of employment loss, and the more elastic the labour demand curve (Froyen, 2005: 293). The diagram graphically illustrates the effect minimum wage increase has had on both mining and farming sector.

In 2012 the Marikana mineworkers went on strike with the intention of having their wages raised and hence improve their standard of living; the strike resulted in a 22% wage increase, and like the farmworkers example above the increase in wages did not come without consequence; Amplats the largest platinum