Microeconomics - ECO 331
The South African labour market falls into the category of a mixed market economic system, where the price mechanism determines at what price labour is supplied dependant on demand; but at the same time government can step in and implement policies where they believe market failure is present. Market failure occurs when markets fail to deliver an efficient allocation of resource. The agricultural sector in South Africa has gone through some major changes in recent times; one of the main highlights being the increase of minimum wages for farmworkers set by government. This raise in minimum wage follows industrial strike action that took place from November through till February 2013, some of which were violent. (2) This decision to increase minimum wages to R105 was announced by labour minister Mildred Oliphant to be effective March 1st 2013 and has received mixed reactions from various stakeholders.(1) We will take a look at the rationale behind this decision, as well as the possible welfare impact of this government intervention. Government usually only interferes in a market where it feels there are inefficiencies that cannot be resolved in a free market. In this case, they (government) chose to intervene in the price mechanism by setting a higher minimum wage largely on the grounds of wanting to change the allocation of resources and achieve what they perceive to be an improvement in economic and social welfare. The exact reasoning behind this decision is not clear cut, but the more obvious reasoning was to achieve a more equitable distribution of income and wealth within the agricultural sector. Following the strikes lead by various unions, government had deliberated different scenarios with relevant parties, economists and the like and came to the conclusion that wage increases were needed to alleviate this market failure. A 52% increase in the minimum wage was agreed and came as a huge shock to many, some joyous while others in disbelief. (3) This raise in the minimum wage has both positive and negative effects; the positives of this sort of intervention can be seen as it motivates and encourages employees to work harder for what they earn and will usually increase the work ethic of employees. It also stimulates consumption of other goods and services by putting more money in the hands of low income earners, in turn increasing South Africa’s GDP (gross domestic product). An intervention like this might also decrease the cost of government social welfare programmes such as grants by increasing the incomes of the lowest paid. Increasing minimum wages might also be seen as a method that encourages efficiency and automation of industry, leading to higher output and greater GDP, accelerating economic growth. Agriculture is an important sector of the South African economy, comprising 2.1 percent of total GDP and therefore this sector needs to be as stable as possible at all times.(2) However, this story is twofold; the after effects of setting a higher minimum wage in a market are usually never neutral, as it always creates ‘winners and losers.’ The largest cause for concern will occur in the business sector as an increase in wage bills will lead to increased overall costs and decreased profitability for farm owners and other stakeholders. The secondary effect of this increase in cost will mean that owners will more likely make use of more affordable mechanisation(4), and in the process the agricultural workforce will be reduced, leading to even higher levels of unemployment – the exact opposite of the SA government’s plans to increase employment. This will affect the unskilled and inexperienced (teens and young adults) the most, as employers will most likely retain employees with higher skills and experience. In the long run, unemployment numbers will most likely increase more than the proportion of the wage increase, reducing overall earnings in this sector and leaving more families in poverty. Also, a higher minimum wage would see certain farms that are generating minimal profits most likely shut down as they cannot cover their operating costs; further increasing unemployment and poverty for more than just the unskilled. Another area of concern is that if workers are not retrenched and continue at the new wage, farm owners will be expected to absorb these increased costs, either by reducing profit margins or be forced to increase prices of goods supplied, of which the latter is more likely. This will cause inflation levels in SA to rise and/or lead to an increased demand for substitute goods such as imports – effectively lowering the GDP generated by the agricultural sector. Such an implication can be seen as anti-competitive in terms of the competiveness of the South African agricultural market versus the world market and is to the demise of our local economy as we will no longer be internationally competitive price wise. Further welfare impacts that could be seen from increasing minimum wages could include; Increasing the likelihood and duration of unemployment for low-wage workers, particularly during the economic downturn South Africa has just experienced. It also encourages employers to cut worker training to save costs, causing the unskilled cycle of unemployment to continue. It can also cause recently unemployed workers to enter new jobs in uncovered (no minimum wage) sectors, thus reducing wages in those sectors. Also it could encourage employers to hire illegal aliens at a lower wage rate, defeating the purpose of increasing employment for South African nationals. (2) While the aim of increasing the minimum wage in the agricultural sector was to help workers obtain a better living, as we can see above, research suggests that minimum wages usually end up harming workers and the economy more than it does good; particularly so for low-skill workers, youth, and minorities, which are the groups that policymakers are often trying to help with these policies. If the government requires that certain workers be paid higher wages, then farm owners need make adjustments to pay for the added costs, such as reducing hiring, reducing benefits, and charging higher prices. These reactions usually counteract the labour market outcomes that policymakers are hoping for. While minimum wages may be a well-meaning attempt to help workers, somebody must pay the price for this increase, and it is usually the least skilled and least fortunate among us. With this said, it is clear that increasing minimum wages in the agricultural sector in South Africa was not the optimum route to follow, as we are yet to see the long term effects of these increases; the disadvantages of which, in my opinion far outweigh the advantages, especially in the long run.
1) Minister reveals new minimum wage for farm workers | Labour | BDlive . 2013. Minister reveals new minimum wage for farm workers | Labour | BDlive . [ONLINE] Available at: http://www.bdlive.co.za/national/labour/2013/02/04/minister-reveals-new-minimum-wage-for-farm-workers. [Accessed 02 September 2013]. 2) The Negative Effects of Minimum Wage Laws | Downsizing the Federal Government. 2013. The Negative Effects of Minimum Wage Laws | Downsizing the Federal Government. [ONLINE] Available at: