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Table of Contents

Ch. Section Page

Introduction 3

1 Economic efficiency of minimum wages 3 - 4

2 The effect on unemployment 4

3 The effect on use and cost of capital in production 4

4 The effect on cost of production and inflation 4

5 The effect on productivity 4

6 The effect on international competitiveness 4

7 The consequence for long-term sustainable economic growth and stability 4 - 5

8 The social consequence 5

9 Wage discrimination 5

10 Suggestions on dealing with unemployment 5

11 Literature consulted 5

Introduction

Minimum wage legislation was introduced in other countries as far back as 1894 in New Zealand followed by Australia in 1896, United Kingdom in 1909 and North America in 1912 (WordIQ (Online), http://www.wordiq.com/definition/Minimum_wage August 10); common to all of these introductions and also to South Africa is conflicting views on the advantages and disadvantages.

Economists, Human Resource Consultants and Human Rights Activists all have respective different arguments; however, common to all is the approach by governments to gain the favour of the voter majority. The question still remains, how beneficial then is minimum wage legislation?

Although the new legislation allotted certain rights to employees and improved the lives of many; it brought with it distinct changes to the employment market, society and the economics of South Africa. This assignment aims to illustrate the effects of the minimum wage legislation highlighting the potential negativities of such.

1. Economic efficiency of minimum wages

South Africa has suffered economically for decades due to numerous factors ranging from Apartheid to the collapse of the world economy; we have suffered double-digit inflation which reigned from 2974 to 1992 which left considerable scars. Although inflation has been reduced to single-digit levels arounf 7,8 per cent over the last ten years (Reserve Bank (Online), http://www.reservebank.co.za/internet/Publications.nsf August 10) this is still too high for an ailing economy and society to improve the basic standard of living.

Studies have shown an inverse relationship between the implementation of a minimum wage and the demand for labour as illustrated below:

"DD" and "SS" are the demand and supply of labour respectively. The original equilibrium wage is "We" and the quantity of labour employed is "Ne". The imposition of a minimum wage at "Wm" decreases the quantity of labour demanded to "Nm" and thus causes unemployment. (Mohr, Fourie, associates, 2000:389)

The resultant advantageous effects may be;

* Reduced dependency of the low-paid on state benefits, which may result in tax reduction

* Stimulation for economic growth by discouraging labour-intensive industries.

Adversely, the disadvantages may be;

* Increase in unemployment for low-wage earners

* Raising employment barriers for people with little or no work experience

* Curbing economic growth due to higher labour costs

* Labour becomes more expensive resulting in discouraging investment

(WordIQ (Online), http://www.wordiq.com/definition/Minimum_wage August 10)

2. The effect on unemployment

As illustrated in 1 above the introduction of this legislation has a direct influence on the demand for labour, the resultant and net effect is an increase in the unemployment of lower skilled who effectively are the unemployable.

This is a country with an already alarming rate of 29,4 per cent unemployment which translates to 4,7 million people.

3. The effect on use and cost of capital in production

A resultant effect on rising labour costs, taking into account that labour is accepted as volatile, employers will hire less labour and invest more in capital goods (The Minimum Wage's Dirty Little Secret (Online), http://www.libertyhaven.com.theoreticalorphilosophicalissues/economics/employmentandunemployment/dirtylittle.html, August 10). Thus the cost of capital increases, however, the technological explosion of the past decade has reduced the cost of capital. Therefore capital investment in the long run is much more effective.

4. The effect on cost of production and inflation

Due to the increase in investment into capital, more technologically advanced equipment and thus the hiring of a more skilled labour force the cost of production increases; the resultant effect is an increase in the price of goods resulting in an increase in the consumer price index and ultimate increase in inflation. This is totally contradictory to the inflation target of the government.