Economics - Minimum Wage

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The role of minimum wages in the South African economy and the potential socio-economic consequences

Abstract

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From an examination of South Africa’s current agricultural minimum wage and unemployment level as a case study. It was concluded that an increase in the agricultural minimum wage, would not provide a solution to South Africa’s unemployment rate and standard of living. But rather that an enrichment of South Africa’s labour force through education and wage incentive schemes, would be the reason for improving South Africa’s social inequality.

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South Africa’s history is riddled with economic exploitation and government has continually tried to right the socio-economic wrongs of the past, through the use of various economic policies and labour legislation. One such legislation has been highly debated in recent months. The legislation in question governs the minimum labour wage for each of the respective economic sectors. According to Burda and Wyplosz (2013:124) “Minimum wages are the legal limits on how low wages can be.” In this essay the advantages and disadvantages of minimum wages will be discussed, with the South African agricultural sector as a case study.

Burda and Wyplosz (2013:124).

Illustrated above is the effect minimum wages have on the labour market. To be of any worth it is essential that the minimum wage Wmin is set above the wage that would be gained in another way (w), and which is higher than the wage set at market equilibrium that the individual would of accepted. The consequence is an employment level equal to Lmin; and unemployment level equal to (Lsmin – Lmin), which is greater than the level of unemployment in a state of collective bargaining (Burda and Wyplosz, 2013:124). Firms may choose not to lower the real wage rage as a counter measure to rising unemployment; this occurrence is called an efficiency wage. Firms may opt to pay higher wages in an attempt to increase the level of output and quality by workers, as well as to attract better job applicants (Burda and Wyplosz, 2013:124). Government sets the minimum wage level whereas an efficiency wage is determined and set by firms themselves.

There are many advantages and disadvantages of implementing minimum wage legislation. Two of the main advantages are the following: firstly economic growth is motivated through the discouragement of labour-intensive industries (Burda and Wyplosz, 2013:124). Secondly minimum wages also reduce the amount of dependency on government by minimum-wage employees, which could lead to a decrease in tax, because less people now rely on social grants to survive. Ultimately the minimum wage aims to protect workers from exploitation. On the other hand the disadvantages of minimum wages have to be studied more closely. Minimum wages can result in an increase in the unemployment of unskilled workers as well as raise employment barriers.

The demand for labour is directly affected by the minimum wage legislation; as a result there is an increase in the unemployment level of the unskilled labour force because of an increase in the minimum wage. The unskilled labour force is ultimately the group of people, the minimum wage aims to protect.

Due to minimum wage increases, firms starts to invest more in capital and less in labour. This increase in capital investment means that firms spend money on expensive equipment instead of labour because it is seen as a better long-term investment. The investment in technologically advanced equipment also means that firms now have to employ skilled workers to operate the equipment, which ultimately also increases the cost of production. As a result the prices of goods increase, which causes an increase in the CPI (consumer price index), which is reflected as an increase in inflation (News 24, 2013). This increase in inflation contradicts what government intended the minimum wages to do, which is raise the...
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