Minimum Wage Policy

INTRODUCTION

For much of the past century, the minimum wage has been a controversial subject among policymakers and economists. The minimum wage policies are implemented by governments to ensure a fair wage for the lowest paid workers; the main objectives of the policy include poverty alleviation and inequality reduction. In terms of income inequality level, South Africa ranks among the countries with the highest level as measured by the Gini Index. Highly unequal distribution of income and opportunities has marked South Africa for so long. The government has been actively involved in various programs to address the issue and has now considered introducing the national minimum wage as the key remedy for poverty and inequality.

The concept

Conventional economic theory predicts that a rise in the minimum wage leads employers to reduce employment in a competitive equilibrium (Stigler, 1946). However a growing number of studies indicate that the relationship between minimum wage and unemployment is not necessarily always negative (Katz and Krueger, 1992; Card, 1992 a, b).

Before discussing the impact of the national minimum wage legislation in South Africa, let us first understand the concept in terms of the economic theory.

ECONOMIC THEORY

The labour market includes workers and firms as participants. Workers supply labour to firms in exchange for wages, and firms demand labour also in exchange for wages. The demand for labour and the supply of labour are the determinant of the equilibrium wage rate and the quantity of labour employed.

When the government imposes a minimum wage which is higher than the equilibrium wage rate, a conflict between the market forces and the force of the minimum wage

A minimum wage that is set above the equilibrium wage rate is said to be binding, while a minimum that is below the wage rate is non-binding, and has no effect in the market equilibrium.

Because the equilibrium rate is legal in the case of a non-binding minimum wage, we will focus on the binding minimum wage which has an effect on the labour market.

Our model assumption is thus that a government will only impose a minimum wage that is above the market clearing level. The effect of an increase in real wage on quantity of labour supplied implies that more individuals will be willing to work if the market salary is higher. In other words, individuals who operate outside the workplace will now be attracted to labour market because of the advantages it offers following minimum wage increase.

The effect of an increase in minimum wage on quantity of labour demanded, that is, its effect on employment, implies that firms will reduce their labour needs if the cost of labour