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.

Clear, Simple and Wrong

The reason opinions are so cheap is that everyone has one and nobody wants to buy anyone else’s. I’m no different.

I’m not going to try to sell you mine. I would like to present you with some ideas to think about before you overpay for someone else’s though.

Jon commented on a recent post of mine and, guessing I’d be interested, directed me to a fascinating opinion piece by Mark Gilbert on Bloomberg covering a range of current economic issues. I suggest you read it now. It’s ok, I’ll wait.

Right, some pretty compelling points are made there. I disagree with many of them, but they are pretty compelling at first read. Here’s my rebuttal to those I’ve heard discussed most commonly in recent times (typically with head nodding all around).

Gold is not the answer to all our currency problems

All of a sudden it’s popular to talk about how fiat currencies are not worth the paper they’re printed on, how it’s a scam, how we’d be better off with a metal-backed currency. They’re wrong. This is a complex area so I’ll only touch on the points rather than try to explain each of them in detail.

Broken promises and speculator spectacles

A metal-backed currency is only as good as the government’s promise to stick to the standard. History shows this promise has been broken regularly. By attempting to stick to a standard, it’s like waving a red, pheromone-doused flag to an amorous bull (a.k.a. currency speculators. The Bank of England was hit by this in the 1930s and again, albeit with a different kind of peg, in the early 1990s by Soros). Continue reading “Clear, Simple and Wrong”

Our currency isn’t alone (get Real)

The Rand is much stronger against the US Dollar now than any time in the last 18 months. Aside from a brief blip at the end of 2007, it’s actually back to 2006 for the Rand to be stronger.

Given that our inflation has been higher than US inflation by some margin at every point in the last decade (and probably more, but I haven’t confirmed) and that our interest rates have been higher too, both Relative Purchasing Price Parity and Absolute Purchasing Price Parity would suggest that our currency should weaken against the US Dollar over time. Continue reading “Our currency isn’t alone (get Real)”