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Minimum wage must beat the cost of new technology in the fourth industrial revolution

Published on   January 31st, 2019   |   by   Isaah Mhlanga

Minimum wage must beat the cost of new technology in the fourth industrial revolution

There is evidence to show that minimum wages of R20 per hour or R3500 per month that became law on 1 January 2019 is too high relative to other emerging markets. The forecast by the esteemed Harvard Economist Professor Haussmann is that this will lead to job losses. To paraphrase him, it doesn’t make sense that a country with the highest youth unemployment and low skills workforce implements one of the highest national minimum wages (NMW) even when compared with OECD countries. This view was not refuted at the Economic Colloquium that took place in December and January, but understandably, the sheep has said politically for this to be reversed.   


Government, business and civil society all put the perpetual high unemployment rate, which stood at 27.7% at the end of the third quarter of 2018, as one of the three biggest challenges, together with the high poverty and inequality levels, facing South Africa. I was encouraged that the Minister of Labour Mildred Oliphant, on 30 January 2019, announced a 13-member National Minimum Wage Commission that is tasked with reviewing the NMW, sectoral determinations, assessing the impact of the NMW on the economy and making recommendations for wage adjustments. While seeking to protect low paid workers, the commission must seek to recommend changes in the minimum wage legislation that will be conducive for the reduction of unemployment.   


The commission will need to consider several aspects to ensure that the legislation meant to protect poorly paid workers does not become the reason for unemployment remaining high or increasing in future. The most obvious fact to keep in mind is that entrepreneurs neither start private enterprises to create jobs nor are they sympathetic to labour; they start businesses to make profit and labour just happen to be one of the inputs, like fertilizer in agriculture or cement in construction, required in the production process.


The second point is that the forth industrial revolution creates technology that compete with labour, and is here to stay. What will complicate the commission’s task in this regard is that the cost of labour generally rises while the cost of technology falls. The moment the cost of technology falls below that of labour, the unsympathetic entrepreneur will quickly substitute labour with machines and the unemployment rate will go up. Too high minimum wages relative to the cost of technology will only incentivise faster technological adoption at the expense of low skilled workers. Therefore, in sectoral minimum wage determinations, it will be important for the commission to recommend setting minimum wages that keep the cost of labour lower than the cost of technology, which will necessarily differ by sector.  


The majority of those that are covered by the minimum wages are low-skilled workers, which research by the World Economic Forum says that they are at risk of being replaced by technology even without the minimum wages in place. The current stance taken by unions and accepted by government through the implementation of the minimum wage seems to ignore the tectonic shifts in labour markets that will be brought about by the fourth industrial revolution. It implicitly assumes that South Africa is immune to global forces.


While the minimum wage increases the income of those that have jobs and helps to reduce inequality, it has the potential to reinforces the very same exclusion from economic participation that the country is trying to eradicate for those that are languishing in unemployment. If those with jobs are at risk of being displaced by machines, those without jobs stand little chance of getting into the labour market if minimum wages are too high. The more important task then is that of making sure wages do not become a deterrent for those without jobs from finding employment.


The role of labour unions need to evolve beyond the protection of small segment of employed people at the expense of unemployed people. The catch all phrase of inclusive growth implies that there must be economic growth and that a broader society must participate in generating that growth and in the sharing of that growth.