The Impact of Minimum Wage on Unemployment

Theories and principles of unemployment and minimum wages

What Is The Impact Of a Minimum Or Living Wage On Unemployment?

What Are The Counterarguments Against This, And, Is It Possible For a Minimum Wage To Reduce Unemployment Rates?

Many theories and principles explain unemployment and minimum wages. According to the classical method, as proposed by Pigou and Solow, the labour market depends on supply and demand for labour. According to Pigou’s Theory of Unemployment, the latter (unemployment) occurs due to a lack of information, the nature of labour markets and search for new jobs (Di Matteo 2016).ILO defines minimum wage as a specific amount of money that an employer has to pay to its employees. Minimum wages exist in almost 90% of the member states of ILO (Harasztosi and Lindner 2019). South Africa is a developing country that has an increased unemployment rate of up to 36%. Even people who work receive low wages due to which the problem of unemployment is not solved. Though the minimum wage will not solve the entire problem, it will at least benefit the poor. The essay aims to state that the minimum wage causes unemployment.

Not only minimum wage, but there are other factors too that affect unemployment in a country. Whether minimum wage affects employment is a widely debatable topic in economics. Due to the recent recession, the rate of employment for younger as well as low-skilled people deteriorated. Minimum wage does affect employment. If a minimum wage is considered, then it gives rise to two issues: firstly, the minimum wage is decided at the state level, and secondly, true effects on outcomes of employment may not always be discrete (Grimshaw 2016). There are frictional and structural causes of unemployment. One cause of frictional unemployment may result when an employee voluntarily leaves the organisation. Secondly, college graduates looking for jobs that suit their skills as well as qualifications (Martin 2017). Thirdly, due to advanced technology, computers and machines have replaced labour workforce. Finally, unemployment occurs when the applicants exceed the list of jobs that are offered to the employees (Murtin and Robin 2018). A fixed minimum wage hurts the workers and is unable to protect and fulfil the need of the workers. According to some theorists, a minimum wage is imposed by the government to create value for the workers. For instance, if a person is hired for the role of a machinist, then the owner will be aware that the worker will not be as productive as an experienced employee, therefore, he will pay the worker a lower wage than the rest. Hence, the minimum wage is not always a good option to fight the evils of unemployment. As stated by leading economist, Warren Buffet, minimum wage raises unemployment as the employers are unable to hire new candidates and more incentives are given to outsourcing the task that was earlier completed by low-wage workers. During unemployment, more money will have to be spent by the government for making unemployment benefits and the government will be receiving low tax as well. Unemployment will further lead to crime, social alienation as well as vandalism. Economists believe that full employment cannot be achieved without inflation. Strong incentives should be offered to employees for their retention. The minimum wage also gives rise to inflation (Brummund and Strain 2018). If an employer increases the minimum salary of an employee, then he is bound to increase the cost of the product in the market to make up for the expenses. This results in push inflation which, according to some economists, is worst. A fixed minimum wage sometimes results in laying off employees that would lead to unemployment. It would also force businesses to close. If the minimum wage is increased then, many adults and teenagers will lose their job as they are the ones who benefit from this policy (Meer and West 2016). Minimum wages sometimes decrease the benefits of employees and increase the payment of tax. Sometimes the employers may outsource their jobs where labour costs are low. Therefore, the minimum wage has a lot of impact on unemployment. But other factors too affect the unemployment rates of a country. South Africa ranks highest in unemployment rates. Though South Africa is now enjoying its democracy, including an unrestricted flow of economy as well as job opportunities. However, it is still lagging behind from other developed as well as underdeveloped countries (Anand, Kothari and Kumar 2016). One of the reasons for unemployment in South Africa is due to the poor education system. Deliberate exclusion of South African people from the system of education and occupations under the apartheid has led to high rates of unemployment. The education system is unable to provide skills that are necessary for the labour market. Another factor for unemployment in the country is fewer jobs and more applicants. Women have now entered the market especially in Africa but they are unable to find the job that suits their skills. Due to the global recession that occurred in 2008-2009, many workers lost their job, especially workers in the manufacturing sector. The companies were no longer in the situation to retain their employees that ultimately led to unemployment in the country. Some researchers argue that the demands of labour in South Africa have further made the regime inflexible while some say that a living wage would improve the employment condition. The government too is unable to cope with the situation. The National Development Plan calls all the South Africans to take the initiative together and realise the importance of reducing unemployment. Only 12% of African men and women are working compared to 14% of white men and women.  Due to advancement in technology many people in Africa who depends on agriculture as their livelihood are left unemployed (Aucoin and Cillier 2016). High reservation wage in Africa is another reason that people choose to stay at home. Reservation wage is the lowest wage that makes an individual willing to work (Le Barbanchon, Rathelot and Roulet, 2019).

Factors affecting unemployment

Figure 1: Unemployment Ratio in South Africa

Though the government of South Africa has adopted the National Minimum Wage policy, certain points need to reviewed while making recommendations- retaining the importance of minimum wage, the productivity of the markets, an adjustment in making employment, and the employer’s ability to run the business successfully. The minimum wage can help to reduce poverty as well as inequality in South Africa. Inequality in the country is due to the difference in wages (Chikozho 2016). The minimum wage will at least help the employees to stand equally in the labour market. However, other factors need to be taken into consideration. The education system needs to be improved in South Africa, which will increase job opportunities both in and beyond the borders and thereby reduce structural unemployment. People should be trained as good education makes the workers skilled. Apprenticeship schemes aim at providing the unemployed with the necessary skills to find new jobs. Monetary and fiscal policy needs to be developed which will increase the aggregate demand and cut taxes. The minimum wage needs to be decreased to reduce unemployment further. Furthermore, there is a necessity for ample labour markets to hire employees. With an increase in aggregate demand, there will be an increase in GDP. Similarly, with strong growth in the economy, there are lesser chances for the firms to go bankrupt. Another method for reducing unemployment is to reduce the increasing influence of trade unions in the market sector. Firms should be given loans and subsidies to employ long-term unemployed people. This will boost the confidence of the latter; however, it may be expensive. The government should make policies for the unemployed people that will benefit the unemployed as well as the employed. Economists say minimum wage is not able to afford the cost of living. The main problem of a minimum wage is that it is not fixed; the rates differ in state and federal. The government of South Africa is now trying to give tax breaks to big organisations to set up their firms in depressed areas. Developing countries like South Africa should not only depend on minimum wages to reduce unemployment as it is not always successful. The statutory body of Africa should encourage entrepreneurship and innovative ideas for creating products as well as market demand which will help in generating employment opportunities. There has been an increase in the employment facilities in South Africa. Therefore, the country should pay attention to the factors that are stated above to reduce unemployment in their region, as minimum wage too can sometimes be the reason behind unemployment for many underdeveloped countries.

Impact of minimum wage on employment

Figure 2 Growth of Employment in South Africa over the years

Higher minimum wage sometimes leads to the loss of a job, especially among poorly skilled workers. A minimum wage that is bound on the organisations results in unemployment in two ways. Firstly, employers will look for a substitute for poorly skilled workers. Secondly, the new mix in inputs, as well as higher wage, will reduce the product and the labour demand (Neumark D 2018). Sometimes the reason for implementing minimum wage becomes quite ambiguous. Minimum wages are generally raised when the labour markets are tight. However, an increase in the minimum wage may be a positive shocker for nearby states while the negative effects of minimum wages are obscured. The labour market is quite complex, and experienced workers have many skills so a minimum wage automatically forces the employers to hire few low-skilled employees in favour of high-skilled ones. The minimum wage in the US is made by labour and other state laws.

However, the policy of minimum wage has been used in the past to intervene in the markets to regulate the wages and labour working conditions in countries around the world. The theory of adopting the minimum wage policy to meet the needs of employees has been widely accepted by all and has now become a part of international law. Some theorists argue that minimum wage reduces unemployment. Raising the minimum wage increases the productivity of the workers. The morale of the employees is boosted when they are satisfied that they are being treated equally in their workplace. It also leads to better physical as well as mental health of the employees. Minimum wage policy also results in low employee turnover which reduces the training and the recruiting expenses. It further boosts the economy of the state as a whole. Despite minimum wage leading to job loss, many policymakers have tried to increase the minimum wage over the years. Some supporters of minimum wage argue that minimum wage would help families to come out of poverty as well as local economies will take a boost through the spending powers of workers (Dube 2019). Supporters of the minimum wage also believe that the latter has positive effects as more money will lead to more expenditure that will automatically increase the economic activity. An increase in minimum payments will increase the demand as well as create new jobs for the employees. Higher wages will also increase tax revenues. It will also help the families to keep up with rising inflation. According to some supporters, when workers or employees are given a minimum wage, they depend less on governmental programs for their welfare. The minimum wage also helps in reducing inequality. However, an increase in the minimum wage will always have more ills than positive effects. Apart from minimum wage, other factors should also be considered while treating the issue of unemployment.

The counterarguments against minimum wage

To conclude, it is essential to note that minimum wages do not always help the employees and the state. Though it may be used as a short-term policy, it cannot be beneficial in the long run. The minimum wage has a significant impact on unemployment. It reduces the self-growth of the individual and further leads to poverty. However, it is not the only reason for unemployment all over the world. Other factors like poor education, inequality, inefficient governmental policies and geographical depression can also lead to unemployment. Similarly, resolving the issue of the minimum wage will not be sufficient. All the problems that give rise to unemployment should be taken into consideration while solving its problem. The advantages and disadvantages of minimum wage suggest that it can help in improving employment opportunities depending on how the government policies are implemented. Education expansion and better health care facilities help in promoting capital and contributes to the growth and output of the employees. Services like finance, trade, insurance also have employment potentials. As unemployment is a severe problem, some output growth needs to be sacrificed for more employment opportunities. The government should adopt specific policies that encourage the decentralisation of the activities of the industries. Therefore, positive steps should be taken to fight the evils of unemployment.

References

Anand, R., Kothari, S. and Kumar, N., 2016. South Africa: Labor market dynamics and inequality. International Monetary Fund.

Aucoin, C. and Cilliers, J., 2016. Economics, governance and instability in South Africa. Institute for Security Studies Papers, 2016(293), pp.1-24.

Brummund, P. and Strain, M.R., 2018. Does Employment Respond Differently to Minimum Wage Increases in the Presence of Inflation Indexing?. Journal of Human Resources, pp.1216-8404R2.

Chikozho, C., 2016. The disjuncture between economic growth, poverty reduction and social inclusion in South Africa. Inclusive Growth and Development Issues in Eastern and Southern Africa, pp.109-138. 

Di Matteo, M., 2016. Towards a rational reconstruction of Pigou’s ‘Theory of Unemployment’. In Research in the History of Economic Thought and Methodology (pp. 339-356). Emerald Group Publishing Limited.

Dube, A., 2019. Minimum wages and the distribution of family incomes. American Economic Journal: Applied Economics, 11(4), pp.268-304.

Grimshaw, D., 2016. Minimum wage. Edward Elgar Publishing Limited.

Harasztosi, P. and Lindner, A., 2019. Who Pays for the minimum Wage?. American Economic Review, 109(8), pp.2693-2727.

Le Barbanchon, T., Rathelot, R. and Roulet, A., 2019. Unemployment insurance and reservation wages: Evidence from administrative data. Journal of Public Economics, 171, pp.1-17.

Martin, F., 2017. The influence of unemployment insurance benefits upon the social cost of labor in lagging regions. In Regional Economic Development (pp. 244-268). Routledge.

Meer, J. and West, J., 2016. Effects of the minimum wage on employment dynamics. Journal of Human Resources, 51(2), pp.500-522.

Murtin, F. and Robin, J.M., 2018. Labor market reforms and unemployment dynamics. Labour Economics, 50, pp.3-19.

Neumark, D., 2018. Employment effects of minimum wages. IZA World of Labor.