Raising minimum wage is a mistake.

Mr Sata’s decision to raise the minimum wage is his first economic mistake as president of Zambia. Hopefully there won’t be too many such mistakes on balance, compared to good decisions. When he was announcing this he asked the professionals present in his audience if they would accept 450,000 kwacha as their salary (the minimum wage). Do unto others as you would want them to do to you, he admonished (in consistence with his promise to lead by Christian principles).

But this was the wrong rhetorical question to ask his audience. The fact is that even these professionals are grossly underpaid. If they moved to a better economy most of them would more than quadruple their salaries. So by the president’s logic, even they should have their salaries at least doubled.

I am surprised that the Economics Association of Zambia has not already reacted to this policy statement and the fallacies embedded in it since there are many economists who now (should) know the error of such policies, from all the examples already available. Or perhaps I’ve misunderstood their function as an association.

An economy’s wage situation can not be fixed by simply ordering employers to increase wages or face jail. If this was the solution then the president could easily solve the problem of brain drain to greener pastures by simply ordering Zambian employers to increase the salaries of these professionals too. Why stop at the lowest workers? If he could order all hospitals to quadruple the wages of nurses and doctors, for example, the problem of these professionals leaving the country for better paying jobs elsewhere will be solved, right?

That’s obviously ridiculous. The hospital can’t afford to pay a nurse 3000 dollars because it doesn’t make that much money from patients. If it increased patient fees to meet this need, no one will go there, because its patients don’t get that much money.

This makes sense to many people. But the logic is the same even for the lowest paid workers. A nurse or teacher who takes home 3 million kwacha from his job can not pay 1 million kwacha to his house servant. There’ll be too little money left for his own family’s needs.

Just like a hospital this house servant employer can only manage to increase his servant’s wage if he can also receive more money from his job. But he won’t because his company can’t just increase its charges to its customers in an economy where people make so little money in general.

It is clear then that the answer lies only with the growth of the whole economy. The reason Botswanans pay their nurses more (and these nurses in turn pay their house servants more) is not because their bosses believe in “doing into others as you would have them do to you”. They are not any more Christian than Zambians are. The president was wrong to imply that the reason zambians pay such small wages is because they have no empathy for their workers. Botswanans pay more because they make more. This is because their economy is much stronger.

Botswana’s economy became that strong because of its powerful pro-growth economic policies. Botswana in fact holds the world record for average economic growth rates since its independence. This is why their people can afford to pay higher wages and even attract brains from Zambia and other African countries. It did not happen by government ordering them to pay higher wages. Shortcuts don’t work. And for a small economy, shortcuts can be disastrous. When people are forced to pay above what they can afford, they will just fire some workers. That will mean higher unemployment.

This is just another example of how good-hearted intentions can lead to unintended negative  consequences that are bigger than the problem they were trying to solve.