Minimum wages, unions and employment

The debate around jobs, jobs at any cost, fair wages, fair working conditions, exploitation and what truly is best for the economy is complex.  Don’t let anyone tell you different.  If it really were that simple we’d have finished having the same debate while the Feudal System was still active.

However, the recognition of the issue that minimum wages and strong labour laws (in favour of labour) can make labour less attractive, less affordable and therefore lead to lower employment has been missing form government debate for many years.

Then I saw this story on Business Day: Patel grants reprieve on minimum wages.  At issue is 385 clothing manufacturers  and 22,000 jobs.  The companies have been given a temporary reprieve until the end of December to pay wages below legislated minimum wage.

Also at issue is the call for greater protection for the textile industry.  Current import duties are around 40%. That is a significant additional cost for all consumers to bear. The vocal employees and unions and employers within the textile industry want us all to pay higher prices so that they can stay in business.

At or near full employment, this protectionism could only make sense if the local textile industry were considered a good prospect for long term competition and value.  A so-called infant industry (hopefully one that will grow to become an international player). It’s abundantly clear that the textile industry in South Africa has no special competitive advantage or potential.

However, the argument is more complicated when we have an economy way below full employment, and a competitor country with an artificially weak currency propping up a politically powerful export sector. I’m not (yet) saying protection for our textile industry should be increased, but based on my thinking and research recently I’m starting to understand that the problem is more, not less, complex.

The danger is that the right policy decisions will always be clouded by very loud lobbying and special interest group needs. We need more careful analysis and fewer emotive ideas.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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  1. Yeah, tough one. You say “It’s abundantly clear that the textile industry in South Africa has no special competitive advantage or potential.” – so does it or should it have any future?

    In the end consumers do end up paying for an inefficient and uncompetitive product.

    One of our primary goals should be to find the most productive and efficient use of our resources rather than artifically stimulating it like this. Definitely not easy with such high unemployment, as you noted, because we already are clearly bad at doing this.

    I believe regardless of how much we analyze it, stimulating entrepreneurial growth, by encouraging small businesses growth and making our products competitive globally, is the only feasible way forward.

    1. Thanks Darren. Some good points. Two thoughts / responses of my own:

      There is a view that head-to-head manufacturing competition with China, be it textiles or anything else, is likely to fail. This is only partly about currency dodginess. The rest is simply the scale that the Chinese now have. That scale can be a curse as well. Short runs, quick start-up times, quick delivery times to Africa are better achieved through a South African manufacturing base. Whether there really is a large market for nimble, niche players I don’t know, but there certainly is hope, rather than the hopeless situation of large productions runs with long lead times. This actually brings me to another point.

      Small business and entrepreneurial growth is a huge engine for economic development, upliftment, social mobility and wealth creation. It’s also consistent with the niche, nimble way of competing with the Chinese that seems to have some merit. Stimulating this growth is hard. Easier, and arguably more effective in South Africa, is removing the hindrances. Removing the red tape, the CIPRO-disaster, making capital raising easier, decreasing regulatory complexity, decreasing the unattractiveness of labour, providing excellent education etc. With these things the natural skills and energies will be focussed on the capitalist profit incentive and should do wonders for our economy.

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