Minimum Wage Debate.
Fiddling with wages by
fiat can poison the job market. However, a moderate minimum wage,
when set by
technocrats instead of politicians, may blunt this effect.
How Much is Enough?
Minimum wage debate is on the air again. The State of
California appears to be the standard bearer in the debate, proposing to raise
its minimum wage to $10 an hour by 2016. It may be stated here that
California’s proposal – a minimum wage of $10 an hour – is higher than that of
any other state in the country, at least for the time being.[i] No wonder the increase inspired some copycats: In November 2013, the
voters in New Jersey approved a proposal to raise that state’s minimum wage
from $7.25 to $8.25, making that state the fifth state to increase its minimum
wage in 2013.[ii]
In states like South Dakota, Massachusetts, Idaho and Alaska, the push for a
minimum wage hike has grabbed headlines throughout 2013 and continues today as
if advocates and the state establishments are in a court battle. Meanwhile, in
states like Maryland, Illinois, Hawaii and the District of Columbia, it is
actually the elected officials who are leading the crusade for a higher minimum wage.
If the position of the
states is the biggest propaganda on the issue of minimum wage, the actions of
organized labor and liberal groups are a close second. These groups have backed
a wave of strikes by fast-food workers in the major cities of the countries,
arguing that hourly wage hikes is justified by practical reasoning and a fair
appraisal of the plight of the low skilled workers. Here’s the most surprising
part: They are pressing for a value that
is more than twice the $7.25 federal minimum wage[iii],
namely, a $15 hourly wage.
What is certain is
that, by law, states are not allowed to set a minimum wage that is lower than
the federal standard. However, they has the freedom of establishing a higher
minimum wage than this standard stipulates. The state that currently pays the
highest minimum wage to its workers – a wage of $9.32 – is Washington. Next in
rank are the states of Oregon and Vermont, with minimum wages of $9.10 and
$8.73 respectively. Illinois, the District of Columbia and Connecticut all have
a state minimum wages of $8.25. [iv] The
individual cities in the country seem to be adopting their states’ standards
with respect to minimum wage hike: As of 2013, about 120 cities has made laws
that required businesses that receive city contracts to pay their employees
what they term “living wages,” which in some cases ranges from $9-$16 an hour.[v]
California’s passage of
a $10 minimum wage, however, was the spark that ignited the push for action in this
area by other states for one reason: It appeared to have set a standard which
these states should aim for. But the most surprising thing about it is the
enthusiasm with which many states are
endorsing minimum wage hike – particularly at this time when all efforts
to increase federal hourly wage have stalled at the Congress. It should be
observed here that the last time that Congress raised the minimum wage was in
2007. Since then, the Democrats in Congress have been canvassing for raising
federal minimum wage to $10.10 per hour by 2015 – a strategy they want to use
to lift their fortunes both locally and nationally.[vi] But
unfortunately, it is unlikely that the Republicans – who currently controls the
House – will approve it.
Market
Sense – The Case for Moderate Minimum Wage
The debate about
minimum wage is not limited to the U.S. economy alone: On both side of the
Atlantic, politicians are warming to the idea that a critical purpose of labor
law is to address the unequal bargaining power between workers and their
employers by establishing minimum standards for wages, safety and other terms
of employment – measures that would
enhance the quality of life of the lowest paid workers. Germany, for instance,
is one of the few advanced countries that
do not have a national wage floor. However, as of December 2013, the incoming
coalition government passed a resolution on across-the-board hourly minimum of
8.50 Euros ($11.50), starting from 2015. Even in Britain, which has a minimum
wage since 1999, the opposition Labor Party are discrediting the perceived “freedom
of contract” system that enshrined the right of employers to exploit, and
workers to be exploited, and are thus cajoling firms into voluntarily paying
higher living wages.[vii]
From a functional point
of view, fiddling with wages by fiat is not a big hit with the free-market types.
Generally speaking, in a competitive market anything that artificially raises
the price of labor will cause employers to pay their workers more than the
value of the additional products that the produce. And since employers
typically are not willing to do this, such economically unsustainable minimum
wage legislation will curb the demand for labor, and the very people who the
intervention is supposed to help – that is, the least skilled workers – will be
the first group to lose their jobs. This explains why Milton Friedman, a
renowned economist, argued that minimum wage legislations are a form of
discrimination against the low skilled workers. [viii]
It also explained why he noted that a far more sensible means of reducing poverty
is to top up the incomes of the working poor with public subsidies.
The unhappy truth is
that there is no free lunch when the government mandates a minimum wage that is
above the market wage rate. However, the case for action to help the low-paid
has continued to grow due to the widening income inequality as well as the shrinking
workers’ share of national income. More important, though, is that, in this era
of austerity, when there are many other pressing claims on national coffers,
addressing the problem through subsidies for the working poor can be an uphill
task for the government. Besides, other policy options, including the use of
confiscatory taxes, are neither realistic or attractive.
One evidence of the
distributional effects of a minimum wage that is set above the market rate is
provided by Linda Gorman, a writer for the Library of Economics and Liberty.
She summarized the results of Australia’s experience on minimum wage
legislation thus:
“Australia provided one of the earliest
practical demonstrations of the harmful effects of minimum wage laws when the
federal court created a minimum wage for unskilled men in 1921. The court set
the wage at what it thought employees needed for a decent living, independent
of what the employers would willingly pay. Laborers whose productivity was
worth less than the mandated wage could find work only in occupations not
covered by the law or with employers willing to break it. Aggressive reporting
of violations by vigilant unions made evasion difficult. The historical records
shows that unemployment remained a particular problem for unskilled laborers
for the rest of that decade.”[ix]
The above analysis do
not mean that a moderate minimum wage is not desirable or practicable. As a
practical matter, real labor markets are not perfectly competitive. Thus, given
that workers who want to change jobs face costs and risks, it is still possible
for the employers to set pay below its market-clearing rate. This implies that
a minimum wage could boost pay with no ill effects on jobs, provided that it is not set too high.
Evidence
from Europe and United States
The above argument is
supported by empirical evidence from both Europe and America. In flexible
economies a low minimum wage do not always decrease employment among
low-skilled workers. The United States has one of the rich world’s lowest
federal minimum wage – at about 38 percent of median income. Broadly speaking,
most independent studies conducted within the country find no serious harm to
employment from federal or state minimum wages. Britain has a similar
experience: At around 47 percent of median income, with a lower rate for young
people, that country’s minimum wage also does not seem to cause job any loss.
In rigid labor markets,
however, high minimum wages can hit employment hard. France, for instance, has a
wage floor that is more than 60 percent of the median for adults and a far
bigger fraction of the typical wage for the young – the highest among the rich
countries. It is thus not surprising that France has shockingly high rates of
youth unemployment, which, as of 2013, was as high as 26 percent for 15-20 year
olds.[x]
The above explanations has brought to light two lessons in the
system, usually obscured by near – unanimous commitment to setting or changing
minimum wages at almost any cost. The first lesson is ensure that the minimum
wage level is pretty low, specifically, to set it at a level that is less than
50 percent of the median wage, while, at the same time, implementing lower
levels for the less productive workers such as the young and the long-term
unemployed. Given that Germany’s proposed level is, by one calculation, 62
percent of the median wage, it risks breaking this rule. As a matter of fact,
in the eastern part of the country, which is considered to be the country’s
less productive region, only 17 percent of the workforce is paid less than 62
percent of the median wage, which suggests that jobs will be lost in the
region. In a similar vein, the proponents of minimum wage hike in Britain are
calling for a value that is 20 percent higher than the minimum wage and, as a concession
to practicality, it must be conceded that that could hit employment. On the
positive side, even though America’s
proposed increase is big, the minimum wage would still be about 50
percent of the median wage.[xi]
Second, the politicians are not qualified to set
minimum wages. Let’s face it: Even though
minimum wage legislations may sound so populist in the heat of a campaign, it often does not work so well in
the real world of profits and losses when it is set by the politicians. They should delegate the power of setting
minimum wages to technocrats. In Britain, minimum wage levels has generally
advanced gradually because the floor is adjusted annually on the advice of
economists and statisticians working with the Low Pay Commission, and not by the politicians. In contrast, the
American politicians are the people who set the federal floor and,
unfortunately, they often adjust it irregularly in huge increments – a method
that is foolishly simplistic because it favors neither the employers in the
country nor the workers themselves.
The bottom line: The world governments need to realize
that minimum wage legislations are merely a palliative approach to poverty
reduction. Hence, such legislation should not be allowed to distract their
attention from addressing the more fundamental causes of low wages and poverty,
namely, lack of education and skills.
NOTES
[i]
Prah P.M.(2013): Many States Looks to Raise Minimum Wage. The Pew Charitable
Trust. Retrieved January 8, 2013 from http://www.pewstates.org/projects/stateline/headlines/many-states-look-to-raise-minimum-wage-85899505219
[ii]
Livio S.K.(2013): New Jersey Voters Approve Constitutional Amendment Raising
Minimum Wage. New Jersey Online. Retrieved January 8, 2014 from http://www.nj.com/politics/index.ssf/2013/11/nj_voters_approve_constitutional_amendment_raising_minimum_wage.html
[iii]
National Council of State Legialators(2013): State Minimum Wages. Retrieved
January 8, 2014 from http://www.ncsl.org/research/labor-and-employment/state-minimum-wage-chart.aspx
[iv]
Ibid
[v]
Wallace G.(2014): Seattle Mayor - $15 Minimum Wage for City Workers. CNN Money.
Retrieved January 8, 2014 from http://money.cnn.com/2014/01/05/news/seattle-minimum-wage/
[vi]
Martin J, Shear M.D.(2013): Democrats Turn to Minimum Wage as 2014 Strategy.
New York Times. Retrieved January 9, 2014 from http://www.nytimes.com/2013/12/30/us/politics/democrats-turn-to-minimum-wage-as-2014-strategy.html?_r=0
[vii]
The Economist(2013): Minimum Wage – The Logical Floor. Retrieved January 9,
2014 from http://www.economist.com/news/leaders/21591593-moderate-minimum-wages-do-more-good-harm-they-should-be-set-technocrats-not
[viii]
Wilson M.(2012): The Negative Effects of Minimum Wage Laws. Cato Institute.
Retrieved January 9, 2014 from http://www.downsizinggovernment.org/labor/negative-effects-minimum-wage-laws
[ix]
Gorman L. (2008): Minimum Wages. The Concise Encyclopedia of Economics.
Retrieved January 9, 2014 from http://www.econlib.org/library/Enc/MinimumWages.html
[x]
The Economist(2013): Minimum Wage – The Logical Floor. Retrieved January 9,
2014 from http://www.economist.com/news/leaders/21591593-moderate-minimum-wages-do-more-good-harm-they-should-be-set-technocrats-not
[xi]
Ibid
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