Poverty cannot be legislated away

Every individual has his or her own perspective of a country’s budget. Individuals and organisations harbour expectations that what comes from a budget should reduce poverty or increase affluence. For ordinary citizens the yearning is therefore for the Government to increase minimum and other wages so that their spending power improves. 

Tanzanians had their budget last week and many are pleased that minimum wages in the Government sector have been looked into. Ordinary citizens have always wondered why, to abolish poverty, minimum wages are just not raised high enough to put everybody above the poverty line? Increasing the minimum wage in this way sounds so simple, elegant and painless. However if eradicating poverty was so simple, it would surely have been done centuries ago.

The Emperor Tughlak tried something of the sort by decreeing that silver was equal in value to copper. He thought poor people holding copper coins would instantly become as rich as those having silver. Instead rich businessmen quickly submitted copper coins to the treasury and demanded silver in return. Soon the treasury was empty of silver, the rich had got richer and the poor were as badly off as ever. Tughlak failed to realise that the fundamental economic fact — that silver is relatively scarce and copper relatively abundant — cannot be changed by mere legislation.

In Tanzania, let’s say the casual labour rate per day is TShs. 2000/- and casual employment averages 200 days per year. A typical labourer will earn Shs. 400,000/- per year, and be in extreme poverty. Now imagine a benevolent Finance minister seeks to abolish poverty by doubling this wage to Shs. 4000/- a day with the intention of doubling the earnings of workers. At face value one would think that doubling the wage would increase the average labourer’s income to Shs. 800,000/-.

In reality, things do not work in this way. If the price of anything (including labour) rises, the demand for it will fall, other things being equal. If you double the wage rate, employers will sack workers, mechanise and automate production to reduce labour use. Few workers in high-productivity jobs may end up with a higher pay but many more will lose their jobs.

Casual workers may find the demand for their labour falling from 200 days a year to maybe 90 days, in which case their annual earnings will actually fall even though their daily rate is doubled. The long term effects will be worse as employers stop investing in high-wage investments and farmers faced with rising wage bills could shift from labour-intensive crops like rice to plantation crops (like coconuts) that use very little labour. So, a well-intentioned aim to abolish poverty may actually worsen it.

High wages could also induce or encourage the recruitment of less qualified labour that is ready to work for less. This not only reduces the employment potential for local staff but deprives qualified manpower from getting suitable jobs. Thus well-intentioned policies aimed at reducing poverty could end up creating economic stagnation. Talented Tanzanians would then seek to migrate to greener pastures overseas.

According to the Minister of State in the President’s Office, Dr. Abdallah Kigoda in Dodoma last week, over 2 million Tanzanians, equivalent to 12.9 per cent of the total labour force are unemployed. Unemployment in Dar es Salaam, he said, stands at about 46 per cent. Such unemployment figures could easily increase if minimum wages are raised without supportive additional economic measures to boost the economy and if the working class do not assertively strive to increase productivity.

No Government can simply legislate away poverty. Yes, some Governments raise wages without suffering adverse consequences but the answer lies in rising productivity. If the productivity of labour goes up, employers can pay more and yet remain competitive. Considering the recent proposal to increase the minimum wage, Tanzanians need to work hard and increase productivity in order for the system to be able to sustain the increased outlay. If not, the increase in wages could ironically lead to fewer jobs and lesser income.