African American Thomas Sowell argued that ‘the real minimum wage is zero’. His argument is that artificially holding up a wage worked against the laws of the market.

Increasing the minimum pay that individuals can receive is often on the agenda for legislative bodies, from Argentina to Rwanda.

On paper this seems noble; but can artificially increasing pay increase the benefits for all? The reality is that it may but it’s unlikely.

Minimum wage

Very few people will argue that they are paid ‘fairly’, most feel they should be paid more (even bankers). Even fewer people believe an unregulated market will take into consideration living costs.

In the short term, when some costs are fixed, increasing the minimumpay may increase the general wage level. But in the long term, when all costs are variable, employers will simply employ less people and/or offer worse service. A good example of this is in the postal industry.

In Denmark postal workers are compensated above $25 an hour, but the average Dane has to pick up their own packages at the post office, and there is little or no service (depending on area) on the weekends and public holidays. Private services have started making quite a bit of money in Denmark.

One should also mention that when it comes to wages humans are willing to behave irrationally. Rationally, no individual should work for less than what they need to subsist themselves in total.

But many will work for 50% of what they need rather than not work at all. This dynamic is viewable in any environment with excessive unemployment/underemployment.

Measuring ‘fairness’

How does one measure exactly how much one needs to survive? What of a subsistence farmer? What of a domestic a worker who is fed, given housing for free, and other government benefits, yet pays no tax and returns their pay check to rural areas where their purchasing power is higher?

A civil servant in Rwanda can make RWF150,000 living in Kigali which is barely a living wage for the requirements of their skill sets. At the same time a motorcycle driver with a diligent work ethic can make similar levels of money for the simple skill of being able to drive a motorcycle and following directions. How does one measure each of these situations?

Some analysts have suggested thereshould be minimum wage based on the occupations that individuals have – for example one for labourers and one for secretaries. But then there would have to be some oversight office where one could lodge a complaint if they were ‘under paid’.

Government services that require lodging complaints, investigations, then decisions, can take their time to say the least. Not to mention that funds would have to be allocated to pay and train these civil servants.

Government is not the only solution to every problem. Legislators are hired to legislate so one can forgive them for doing just that. That being said there is no rule that all solutions to each problem should come from the government. The government cannot in one sweep make the skills of people more desirable for employers any more than it can force people to like a specific type of food.

The problem of wages is inherently a problem of skills. Employers are unwilling to pay more than what they deem to be the appropriate wage for workers’ skills.

At the same time, with unemployment, people are willing to work for less to meet their needs. Any surplus of supply of any good or services leads to shortages – fewer jobs.

Let’s empower people

Providing people with the skills to meet the needs of the market should be the goal of the government. In the United States with over 6.5% unemployment, employers are claiming they can’t find employees with the skills they need.

The Rwandan government aims to create over 1.8 million off-farm jobs by 2020. A consistent year-on-year increase in foreign direct investment, 4.1% in 2011, means that there will jobs aplenty.

The key is ensuring people have the skills to get these jobs. The better skilled the population, the less the government will have to worry about the minimum wage. 

The writer is a Rwandan economist based in Copenhagen