Minimum Wages: Beneficial or Harmful in Terms of Employment, Poverty and Indiviual Welfare

MINIMUM WAGES: BENEFICIAL OR HARMFUL IN TERMS OF EMPLOYMENT, POVERTY AND INDIVIUAL WELFARE

In the labour market, firms determine the quantity of labour demanded with regards to the increases or decreases of wages, such as, as wages decrease - quantity of labour demanded will increase. The implications of a minimum wage and price floor results in a conflict of market forces and systematically, as the wages increase, the quantity demanded for labour decreases (Parkin 2010: 130-131). A minimum wage price floor ensures that workers are represented adequately and their labour is not exploited. It was found that Price Floor interventions in the labour market are quite harmful (although minimally beneficial) to employment, as well as rather apathetic with regards to poverty. However, the effect on individual welfare is significantly beneficial with regards to domestic workers in South Africa.

The implementation of a minimum wage price floor, is done by government to prevent the exploitation of workers, in this case the domestic workers in South Africa. Government also seeks to ensure that labour relations between labour unions and employers remain intact (Browne; Moore; Thompson, 2009). The domestic workers in South Africa can easily be exploited as they are low-skilled workers and what with poverty and unemployment high in this country, people are desperate for jobs and will settle for low wages and dire working conditions. Since the end of Apartheid this exploitation has been recognized and so in 2002 the Domestic Workers Act was passed, thus government granted domestic workers formal labour market protection as well as increased minimum wages for domestic workers (Hertz, 2004:1).

The effect this has had on employment is more harmful than beneficial. This is best depicted in Graph 1 below.

Graph 1: The inefficiency of the implementation of a minimum wage

Graph adapted from Parkin, 2006

As the price increases from P1 to P2 to create an effective minimum wage, quantity demanded decreases to Q2. The red shaded area represents the probable loss due to unemployed people being forced to now look for another job. The loss is evident in that a person willing to work at P3 is now working at P2 and therefore the unemployed now spend the difference on searching for another job. The entire loss is the grey area (deadweight loss – the excess workers in the market) summed with the red area. In effect this is the total loss that results in unemployment.

As in most free markets, as price increases, demand decreases. Domestic workers can be seen as the product (service) and their employers can be seen as consumers. Consumers no longer want to pay the increased prices for domestic workers, which results in dismals and