Minimum Wage Question 10

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A dozen questions about the National Minimum Wage


Question 10 of 12

10. Does the international experience really show that minimum wages do not reduce employment?


One of the recurring themes of the Panel’s report is the insistence that the international evidence does not support alarmist assessments of the impact of minimum wages on employment. It states, for example, that “The international literature shows that the aggregate effect of the implementation of the NMW on employment is marginally negative or neutral, often statistically undetectable, and sometimes positive”, before adding that “[a] review of global studies has shown that minimum wage-employment elasticities are relatively benign based on international evidence.” This conclusion is tempered, however, by an important qualification: those ‘benign results’ will not hold for any level of a minimum wage. And therein lies the rub. The Panel knows that the proposal it is making for SA in 2017 marks a very substantial departure from existing wages at the bottom of the labour market. This is apparent from the fact that, by its own estimates, 47% of SA’s workers earn less than the proposed figure (see Questions 3), and from the fact that its proposed NMW is significantly higher than the minimum, median and even average wages in a number of sectors (see Question 6).

It is worth noting recent comments by Princeton’s Alan Krueger, perhaps the leading figure in the study of the effects of minimum wages, and the co-author of the most important studies upon which policy-makers rely when arguing that minimum wages do not reduce employment. Writing in 2016 about the proposal to raise the federally mandated minimum wage in the United States from around $7 an hour to $15, a proposal that would affect the wages of over 50% of workers in some states, he noted that such a move would take policy-makers into “uncharted waters” and concludes that it was a risk that was simply not worth taking because of the high likelihood of unintended and adverse effects.

In most countries, a minimum wage is changed only when the labour market is relatively tight, which limits the likelihood of job losses. One of the key reasons why the international evidence does not show high levels of job destruction as a result of changes to the minimum wage is that those changes have been designed to avoid job destruction by focusing on a relatively small group of low-income workers. The failure to detect any significant impact on employment, in other words, is the result of the nature of the labour markets in which such policies have been tried and of the care taken by policy-makers to avoid job losses. To use these studies to justify an NMW in which these conditions do not obtain is misleading and horribly risky.

Obviously, the impact of a modest adjustment to a minimum wage that affects only a relatively small number of people is likely to be much less significant than the impact of a large increase that affects a much broader swathe of workers. An undertaking of this scale is much less common in international experience, and may never have happened on the scale proposed by the Panel in any country anywhere in the world. It has certainly not been tried in a country in which nearly 40% of adults are unemployed. For that reason, any reliance on the ambiguous, mostly benign results from other contexts is enormously risky. It is a risk, however, about which the Panel is either unaware or indifferent.

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