Effects Of The Increasing Labour Cost example essay topic

Table of Contents Ch. Section Page Introduction 31 Economic efficiency of minimum wages 3 - 42 The effect on unemployment 43 The effect on use and cost of capital in production 44 The effect on cost of production and inflation 45 The effect on productivity 46 The effect on international competitiveness 47 The consequence for long-term sustainable economic growth and stability 4 - 58 The social consequence 59 Wage discrimination 510 Suggestions on dealing with unemployment 511 Literature consulted 5 Introduction Minimum wage legislation was introduced in other countries as far back as 1894 in New Zealand followed by Australia in 1896, United Kingdom in 1909 and North America in 1912 (WordIQ (Online), web wage August 10); common to all of these introduction's and also to South Africa is conflicting views on the advantages and disadvantages. Economists, Human Resource Consultants and Human Rights Activists all have respective different arguments; however, common to all is the approach by governments to gain the favour of the voter majority. The question still remains, how beneficial then is minimum wage legislation? Although the new legislation allotted certain rights to employees and improved the lives of many; it brought with it distinct changes to the employment market, society and the economics of South Africa. This assignment aims to illustrate the effects of the minimum wage legislation highlighting the potential of such.

1. Economic efficiency of minimum wages South Africa has suffered economically for decades due to numerous factors ranging from Apartheid to the collapse of the world economy; we have suffered double-digit inflation which reigned from 2974 to 1992 which left considerable scars. Although inflation has been reduced to single-digit levels around 7, 8 per cent over the last ten years (Reserve Bank (Online), web August 10) this is still too high for an ailing economy and society to improve the basic standard of living. Studies have shown an inverse relationship between the implementation of a minimum wage and the demand for labour as illustrated below:" DD" and "SS" are the demand and supply of labour respectively.

The original equilibrium wage is "We" and the quantity of labour employed is "Ne". The imposition of a minimum wage at "Wm" decreases the quantity of labour demanded to "Nm" and thus causes unemployment. (Mohr, Fourier, associates, 2000: 389) The resultant advantageous effects may be; o Reduced dependency of the low-paid on state benefits, which may result in tax reductio no Stimulation for economic growth by discouraging labour-intensive industries. Adversely, the disadvantages may be; o Increase in unemployment for low-wage earner so Raising employment barriers for people with little or no work experience Curbing economic growth due to higher labour cost so Labour becomes more expensive resulting in discouraging investment (WordIQ (Online), web wage August 10) 2.

The effect on unemployment As illustrated in 1 above the introduction of this legislation has a direct influence on the demand for labour, the resultant and net effect is an increase in the unemployment of lower skilled who effectively are the unemployable. This is a country with an already alarming rate of 29, 4 per cent unemployment which translates to 4, 7 million people. 3. The effect on use and cost of capital in production resultant effect on rising labour costs, taking into account that labour is accepted as volatile, employers will hire less labour and invest more in capital goods (The Minimum Wage's Dirty Little Secret (Online), web August 10).

Thus the cost of capital increases, however, the technological explosion of the past decade has reduced the cost of capital. Therefore capital investment in the long run is much more effective. 4. The effect on cost of production and inflation Due to the increase in investment into capital, more technologically advanced equipment and thus the hiring of a more skilled labour force the cost of production increases; the resultant effect is an increase in the price of goods resulting in an increase in the consumer price index and ultimate increase in inflation. This is totally contradictory to the inflation target of the government. 5.

The effect on productivity With relation to the supply and demand of goods which is ultimately related to price. The institution of minimum wage legislation; for reasons mentioned in 3 and 4 above; results in an increase of prices. The increase in prices results in a decrease in demand which subsequently negatively affects productivity. 6. The effect on international competitiveness As a growing economy South Africa is constantly in competition with poor, low-wage economies (Manual, 2004: 12). The effects of the increasing labour cost, increasing cost of capital and increasing cost of production weakens the competitive edge for South Africa.

7. The consequence for long-term sustainable economic growth and stability Low inflation and financial stability support sustainable economic growth, development, equity and employment creation (Reserve Bank (Online), web August 10). The resultant increase in the consumer price index related to the increase in the overall cost of production has a direct relationship with the increase of inflation. This is a non-supportive economical atmosphere for sustainable economic growth. 8. The social consequence Due to the institution of minimum wage employers will tend to reduce non-wage compensation in an effort to minimise their overall production costs (The Minimum Wage's Dirty Little Secret (Online), web August 10), therefore employer provided benefits will decrease resulting on a greater reliance on the government.

Furthermore, as previously illustrated by the minimum wage impact graph, this will result in a decrease in the demand for labour resulting in further unemployment. The result being a degradation of society and a potential increase in crime. 9. Wage discrimination The short-term view is that minimum wage legislation results in the eradication of wage discrimination; this is not necessarily true as unemployment increase the availability of a low-skilled, willing labour force increases. Unscrupulous employers will pounce on the opportunity to employer workers below even the minimum wage, or, workers will be forced to do more work for less. 10.

Suggestions on dealing with unemployment in South Africa Although the minimum wage legislation aims to protect gross abuse of the labour force the adverse effects are obvious. Much can be said about the pros and cons of minimum wages but the examination of how to combat unemployment is a more difficult issue. Greater involvement by national government is required to attract investment and into development in industry. The government as already taken positive steps in the development of Industrial Development Zones, but even these are questionable in location and actual benefits. The real answer in the creation of employment is the offering of incentives for investment through international partnerships and community development through education programmes. This will result in a decrease in unemployment and social.

11. Literature Consulted Mohr, P. Louis, F, associates. 2000. Economics for South African students 2nd Edition. Van Sc haik Publishers, Pretoria, South Africa. Reserve Bank (Online), web August 10 The Minimum Wage's Dirty Little Secret (Online), web August 10 WordIQ (Online), web wage, August 10.