In the 1990s, Paul Krugman, later to win the Nobel prize for his work on trade, wrote: ‘There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook.’
Krugman wrote to explain comparative advantage, the idea that trade between two countries raises the incomes of both. It is a simple and powerful idea, first proposed by the David Ricardo and responsible for the massive expansion in global trade in the second half of the nineteenth century, but is also a surprisingly unpopular one. Why? Because it is intellectually unfashionable. Says Krugman: ‘Free trade … has some sort of iconic status among economists; so, in a culture that always prizes the avant-garde, attacking that icon is seen as a way to seem daring and unconventional’.
How valid this statement is about the South African labour market?
Every economics student at university is taught supply and demand. Where the supply and demand curve intersect is the equilibrium price and quantity. A government regulation to fix the price – say at a price above the market price – will result in a shortage, as more things will be demanded than supplied. This is true for any good – from cars to cigars – but also for labour. Workers demand jobs while firms supply jobs. The equilibrium price in the labour market is the wage. A government-sanctioned regulation that fix the wage – like a minimum wage – above the market equilibrium means that there will be a shortage of jobs, in other words, unemployment.
This is all standard first-year economics. Yet the belief that a minimum wage will have no effect on South Africa’s already record-high unemployment rate is now deeply entrenched by both Krugman’s avant-garde intellectuals and opportunistic politicians and labour union leaders.