The Effects of a Higher Minimum Wage

Thomas Sowell continues his series "Something for Nothing" by writing about the effects of higher minimum wages on an economy. He cites this article from the Economist, reviewing an economic quandry that is occuring in South Africa: The economy is booming, but investment is stagnant. Sowell uses this as an example and cites a rising unemployment rate as a key symptom of inflated minimum wages, as the article suggests. Why? Because wages should be set at what someone's productivity warrants, not what the government thinks is "fair."

If I pay you $10.00 an hour because I have to, but your work is only worth $8.00 an hour to me, then why should I hire you at all? Why not just make the workers I already have work longer? Or better yet, why not get a machine to do the same job? Or even better still, why not out source the job to an economy that believes in paying workers by what their productivity demands you pay?

As if an inflated minimum wage wasn't bad enough for South Africa's economy (and others), Sowell cites job protection laws as having an even worse effect on the economy when compounded with the wage. The employers of SA can't fire their workers easily. So why should they hire more? There is too much risk of hiring somebody you can't fire. Also, when the economy picks up in a boom, why hire more workers if the employer can't fire them when the economy slows down again?

Sometimes, when campaigning for higher minimum wage laws or job protection laws, people think about themselves or somebody they know who may have lost their job, or can barely live off the $5.50 an hour they receive at some fast food joint. While this may be good anecdotal evidence, it fails to take into consideration the effects of the macro economy and thus when these types of laws are passed, it turns out to hurt them more than if things had remained the same.

South Africa's economy is very productive and growing at a respectible 5% a year. They are one of the most productive economies in the world, but because of the greediness of politicians and the short-sightedness of the constituents of South Africa, they are not reaping the benefits they should be.