IMPACT OF MINIMUM WAGE ON UNEMPLOYMENT.

Running head: IMPACT OF MINIMUM WAGE ON UNEMPLOYMENT
IMPACT OF MINIMUM WAGE ON UNEMPLOYMENT
Name of the Student
Name of the University
Author Note

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IMPACT OF MINIMUM WAGE ON UNEMPLOYMENT
Many theories and principles explain unemployment and minimum wages.
According to the classical method, as proposed by Pigou and Solow, the labour market
depends on supply and demand for labour. According to Pigou’s Theory of Unemployment,
the latter (unemployment) occurs due to a lack of information, the nature of labour markets
and search for new jobs (Di Matteo 2016).ILO defines minimum wage as a specific amount
of money that an employer has to pay to its employees. Minimum wages exist in almost 90%
of the member states of ILO (Harasztosi and Lindner 2019). South Africa is a developing
country that has an increased unemployment rate of up to 36%. Even people who work
receive low wages due to which the problem of unemployment is not solved. Though the
minimum wage will not solve the entire problem, it will at least benefit the poor. The essay
aims to state that the minimum wage causes unemployment.
Not only minimum wage, but there are other factors too that affect unemployment in a
country. Whether minimum wage affects employment is a widely debatable topic in
economics. Due to the recent recession, the rate of employment for younger as well as low-
skilled people deteriorated. Minimum wage does affect employment. If a minimum wage is
considered, then it gives rise to two issues: firstly, the minimum wage is decided at the state
level, and secondly, true effects on outcomes of employment may not always be discrete
(Grimshaw 2016). There are frictional and structural causes of unemployment. One cause of
frictional unemployment may result when an employee voluntarily leaves the organisation.
Secondly, college graduates looking for jobs that suit their skills as well as qualifications
(Martin 2017). Thirdly, due to advanced technology, computers and machines have replaced
labour workforce. Finally, unemployment occurs when the applicants exceed the list of jobs
that are offered to the employees (Murtin and Robin 2018). A fixed minimum wage hurts the
workers and is unable to protect and fulfil the need of the workers. According to some
theorists, a minimum wage is imposed by the government to create value for the workers. For

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IMPACT OF MINIMUM WAGE ON UNEMPLOYMENT
instance, if a person is hired for the role of a machinist, then the owner will be aware that the
worker will not be as productive as an experienced employee, therefore, he will pay the
worker a lower wage than the rest. Hence, the minimum wage is not always a good option to
fight the evils of unemployment. As stated by leading economist, Warren Buffet, minimum
wage raises unemployment as the employers are unable to hire new candidates and more
incentives are given to outsourcing the task that was earlier completed by low-wage workers.
During unemployment, more money will have to be spent by the government for making
unemployment benefits and the government will be receiving low tax as well. Unemployment
will further lead to crime, social alienation as well as vandalism. Economists believe that full
employment cannot be achieved without inflation. Strong incentives should be offered to
employees for their retention. The minimum wage also gives rise to inflation (Brummund and
Strain 2018). If an employer increases the minimum salary of an employee, then he is bound
to increase the cost of the product in the market to make up for the expenses. This results in
push inflation which, according to some economists, is worst. A fixed minimum wage
sometimes results in laying off employees that would lead to unemployment. It would also
force businesses to close. If the minimum wage is increased then, many adults and teenagers
will lose their job as they are the ones who benefit from this policy (Meer and West 2016).
Minimum wages sometimes decrease the benefits of employees and increase the payment of
tax. Sometimes the employers may outsource their jobs where labour costs are low.
Therefore, the minimum wage has a lot of impact on unemployment. But other factors too
affect the unemployment rates of a country. South Africa ranks highest in unemployment
rates. Though South Africa is now enjoying its democracy, including an unrestricted flow of
economy as well as job opportunities. However, it is still lagging behind from other
developed as well as underdeveloped countries (Anand, Kothari and Kumar 2016). One of the
reasons for unemployment in South Africa is due to the poor education system. Deliberate

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IMPACT OF MINIMUM WAGE ON UNEMPLOYMENT
exclusion of South African people from the system of education and occupations under the
apartheid has led to high rates of unemployment. The education system is unable to provide
skills that are necessary for the labour market. Another factor for unemployment in the
country is fewer jobs and more applicants. Women have now entered the market especially in
Africa but they are unable to find the job that suits their skills. Due to the global recession
that occurred in 2008-2009, many workers lost their job, especially workers in the
manufacturing sector. The companies were no longer in the situation to retain their
employees that ultimately led to unemployment in the country. Some researchers argue that
the demands of labour in South Africa have further made the regime inflexible while some
say that a living wage would improve the employment condition. The government too is
unable to cope with the situation. The National Development Plan calls all the South Africans
to take the initiative together and realise the importance of reducing unemployment. Only
12% of African men and women are working compared to 14% of white men and women.
Due to advancement in technology many people in Africa who depends on agriculture as
their livelihood are left unemployed (Aucoin and Cillier 2016). High reservation wage in
Africa is another reason that people choose to stay at home. Reservation wage is the lowest
wage that makes an individual willing to work (Le Barbanchon, Rathelot and Roulet, 2019).