Anyone who questions the implementation of a minimum wage in South Africa will be met with fierce opposition. But the merits (and demerits) of such legislation require broader debate. Even if this is an unpopular notion.
In the 1990s, Paul Krugman, who later won the Nobel prize for his work on trade, wrote: “There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook.”
Krugman wrote to explain comparative advantage: the idea that trade between two countries raises the incomes of both. It’s a simple and powerful idea, first proposed by David Ricardo, and was responsible for the massive expansion in global trade in the second half of the 19th century. Yet, it’s surprisingly unpopular. Why? Because it is intellectually unfashionable. Says Krugman: “Free trade … has some sort of iconic status among economists; so, in a culture that always prizes the avant-garde, attacking that icon is seen as a way to seem daring and unconventional.”
How valid this statement is about the SA labour market.
Every economics student is taught supply and demand. Equilibrium price and quantity is where the supply and demand curves intersect. Workers demand jobs while firms supply jobs. The equilibrium price is the wage. A government-sanctioned regulation that fixes the wage – like a minimum wage – above the market equilibrium means that demand will exceed supply, creating a job shortage – in other words: unemployment.
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4 April 2019