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In the article, Minimum wage will protect workers on bottom rung from exploitation (November 26), Imraan Valodia asks us to “applaud the introduction of the minimum wage” because  it will address the challenges of poverty. 

The first iron law of economics ensures that no employer will hire someone at R3,500 who doesn’t produce more than R3,500. Yet, a minimum wage raises the price of labour, making it more expensive to hire people.

Employers now have several choices. One option is to work out what they can afford to pay in wages and split that over a smaller workforce, firing those who don’t make the productivity cut. Alternatively, they can compare the cost of labour against the cost of a machine and choose a larger “capital base”. 

If they are lucky, perhaps employers can pass the new wages on to customers with higher prices.  Or perhaps decide to pay formerly “underpaid” staff the full minimum wage and take the money from the shareholders’ dividend. 

The biggest source of capital funds are monitored by stewards hired by regular people saving for  a rainy day. If returns are down, capital will shy away from those industries and go elsewhere for a better return.

A minimum wage law presumes this was not agreed to by both parties. If the bubble of poverty is squished out in one place, it will pop out somewhere else in the economy.

The only solution is economic growth, but the government would prefer to pander to the unions than set about making hard choices to get the economy back on its feet.

Neil Emerick, Hout Bay


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