Thursday, August 03, 2006

Minimum Wage

Megan McArdle (I'm not sure where Glenn Reynolds has gone to?) has this post on Instapundit discussing the weaknesses of minimum wage policy.

While she is referring to the US tax policies this comment is only too relevant in South Africa. :"It [minimum wage] does a lousy job of targeting poverty, because most of the people who get it aren't poor, and most of the people who are poor don't get it. To the extent that it does help the poor, it often does so by transferring money from other poor people-those who lose jobs due to the higher minimum wage, and those who shop at places that pay the minimum wage."

In some ways it is a pity that unions hold such sway in our government that there is a sense of political incorrectness to even considering or suggesting that we should abolish the minimum wage in South Africa.

Following some of the links takes one to this NBER Digest article where an alternative to minimum wage policy, the Earned Income Tax Credit (EITC), is lauded as follows:  
"the EITC now lifts more children out of poverty than any other government program. In 2002, it removed 4.9 million people, including 2.7 million children from poverty. Advocates see it as promoting the values of both family and work. Traditional welfare programs, according to their critics, do the opposite."

Clearly this is a debate that should enter our political lexicon. Not so much whether EITC would work here - because to benefit from a tax credit  one must be paying tax in the first place which most minimum wage workers do not do (beyond the prohibitive flat rate of VAT that we all subjected to)...Hey... maybe those workers could get a VAT refund?..but that would be impossible to police.

What I am saying is that minimum wage is not the answer, and creative alternatives should be investigated.

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