Wednesday, 12 November 2014

Low Wages and High Unemployment Rate – Where to Go from Here?

Many are familiar with the following proposition:

“If wages are increased, then the cost of labor increases for employers. To reduce costs, employers will not hire as many employees and unemployment will increase.”

It seems to make sense, right? It comes down to the fundamental relationship between price and quantity demanded: if something becomes more expensive, we’ll tend to buy less of it.

So, considering South Africa with an unemployment rate of about 25% and half of all employed workers earning R3000 or less – we seem to be in an impossible position; lowering wages to get more people employed would lower purchasing power even more and all but destroy the value of labor. Increasing wages, an equally important goal, would leave more people without jobs.

So – should we simply raise our hands in defeat and say ‘sorry, this is economics, nothing we can do about it – It is mathematically impossible to achieve both goals from where we currently are?’

What we often don’t see when looking at these propositions, are the assumptions that surround and subscribe them – these are the assumptions that we implicitly accept and have been accepting for such a long time that we have come to see them as ‘undeniable truths’ in the sense that: we don’t even question them anymore, they are just ‘part of the package’.

One such assumption is that only those who are employed should receive an income – or in other words: Income is a function of labor. The more you work, the more you earn. The less you work, the less you earn. And if you don’t work at all, you don’t earn anything at all either. Again, ‘it seems to make sense’. But does it? Can we regard wages and income as just some mathematical variable that can go up or down and that, other than being a number in an equation has no real meaning or value?

I’d like to draw your attention to a section in the Living Income Guaranteed Proposal for South Africa under the heading “Incomes are Lifelines”:

Personal income is the means through which individuals and households acquire access to the products and services they need to adequately support themselves. Traditionally, the argument is put forth that expanding the economy will ‘automatically’ increase the well-being and prosperity for each citizen. We can certainly say that the South African economy has been growing, but we do not observe the promised ‘trickle-down effect’. GDP is therefore not an appropriate indicator for the performance or state of the economy. Economic growth has been shown to take place without any form of equitable distribution. Our current economic model is focused, first and foremost, towards economic growth based on the assumption that most citizens are able to effectively participate in the economy. Those unable to participate or self-support are advised to be supported through government intervention; forcing the government to step in where the economy fails. The government’s interventionist role is designed to be of minimal support and as such, it lacks the capacity to adequately support all the citizens that require social assistance; a percentage representing a large, if not the majority, share of the population of South Africa.

The inequality of opportunity in South Africa – its legacy from a colonial past – has proven utterly unsustainable. We argue that the performance of the economy must be measured in accordance with its ability to provide each citizen with an adequate income –the purchasing power to secure basic human rights – and not according to gross national growth percentages.

We’ve gotten so used to seeing Income as a function of Labor that we forget the real meaning of income as that which – if adequate – enables a person to live a dignified life. Allowing Income to remain a function of Labor alone is in fact a violation of human rights, because within this equation, we allow the possibility of some to earn an income insufficient to support themselves, or worse – no income at all. Where are human rights within such an equation? Where are our Christian values? Our Ubuntu values? Our humanitarian values? It becomes clear then that our definition of income requires a re-evaluation and a new, morally justified, foundation.

To be continued.


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