The Minimum Wage

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Economic Policy on Human Resource Management: Argument for/against Minimum Wage Policy

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The Minimum Wage

  1. 1. By: Mohamed Azmi Taufik
  2. 2.  First enacted in New Zealand in 1894 (US in 1938) there is now legislation or binding collective bargaining regarding minimum wage in more than 90% of all countries worldwide.  Most of Asian countries has legislated minimum wage law including Singapore, Thailand, Indonesia, Philippines, Vietnam, Japan, Korea and Hong Kong.  Malaysia has also announced the minimum wage policy on 1 May 2012 but will be only effective in 6 months after the gazetted date. 2
  3. 3.  Definition and meaning of minimum wage  Labour Supply & Demand Curve  Impact of minimum wage on poverty & economic growth 3
  4. 4.  Labour Supply & Demand  Minimum wage policy and its Impact  Minimum wage in Malaysia  The debate on minimum wage - Pros & Cons  Issues & Discussion  Conclusion 4
  5. 5. The minimum amount of compensation an employee must receive for performing labor. Minimum wages are typically established by contract or legislation by the government. As such, it is illegal to pay an employee less than the minimum wage. Are you for or against a minimum wage policy? 5
  6. 6. W S Equilibrium w D L L In a perfectly competitive labour market, where the wage rate is determined in the industry, which means that the actual equilibrium wage will be set in the market, and the supply of labour to the individual firm is perfectly elastic at the market rate. The equilibrium wage rate is the rate that equates demand and supply. 6 It is assumed that in equilibrium everyone who wants a job has a job. In this sense, the equilibrium value of employment is also called full employment.
  7. 7. Market wage may change following a change in an underlying condition of, 1. Demand or, 2. Supply. 7
  8. 8. Demand can change, and the demand curve will shift, under a number of circumstances, including changes in: 1. The productivity of labour. 2. The price of the product. 3. Demand for the product 8
  9. 9. Labour supply can change under a number of circumstances, including changes in, 1. 2. 3. 4. 5. 9 The length of the working week. Participation rates. Demographic factors. Qualifications and skills required. The length of training.
  10. 10. W S W S1 S1 S E1 w E E2 w E2 E E1 D L L1 L2 10 D1 L D1 L2 L1 L D L
  11. 11. W Unemployment  The floor is a binding constraint on the wage, causes a surplus (i.e. unemployment). S Price Floor Mw  If the equilibrium wage (Eqw) is below the floor and therefore illegal. Eqw  Minimum wage laws do not affect highly skilled workers. D L1 11 EqL L2 L  Often, they affect unskilled and teenage workers.
  12. 12. A binding minimum wage creates,  A surplus of unskilled workers (more unemployment).  Reduces market efficiency  Non-price rationing - employers may discriminate certain types of job applicants.  More labour supply from teenagers (foreigners) - people in need may end up losing jobs. 12 In contrast, the competitive equilibrium market without price floor is more efficient.
  13. 13. The intended objectives of establishing minimum wages are, 1. To prevent exploitation of workers by employers, 2. To promote a fair wage structure, 3. To provide a minimum acceptable standard of living for low-paid workers and, 4. To alleviate poverty, especially among working families. (ILO, 1992). 13
  14. 14. 1. A US study by Card and Krueger (1995) reached the conclusion that an increase in the minimum wage has no negative effect on employment. 2. More recent studies in Europe unanimously stress that minimum wages do not lead to higher unemployment but often even to more employment. 3. Minimum wages increase the productivity of employees and reduce employee turnover, which in turn positively influences the long-term growth and employment prospects of the National economy (Swiss Trade Union Confederation, 2002). 4. Minimum wages have prevented or even reduced a potential extension of wage differentiation. 5. Minimum wage can be seen as an effective instrument for, if not removing, at least reducing income discrimination among these groups (Funk/Lesch, 2006). 14
  15. 15. There are two basic mechanisms for setting the minimum wage. 1. A statutory minimum wage is set by government, possibly involving consultations with trade unions and employers. 2. Minimum wages are determined through collective (tripartite or bipartite) negotiations. Collective agreements can set national or sectorial (industry, occupational) minimum wages. 15
  16. 16. What is the rationale for a minimum wage in Malaysia?  The empirical evidence has clearly pointed to the fact that wage levels in Malaysia has been suppressed and has lagged behind by all measures.  The World Bank has reported that wages in Malaysia has increased by only 2.6% pa. which is below inflation rate of 3.5%. Also the productivity rate is 6.7% which clearly shows the suppression of wages.  National Employment Returns (NER) showed that 34% of Malaysians earned less than RM700- below poverty line. In Sabah and Sarawak, where the cost of living is much higher, the figures are 63% and 48% respectively.  A further 37% nationwide earned below RM700 per month and it is alarming that 72% of workers earned less than RM1,500 per month. Malaysia Poverty Line Income (PLI) 2009 is RM720 16
  17. 17. What is the rationale for a minimum wage in Malaysia? 17
  18. 18. 1. To ensure basic needs of workers and their families are met, 2. To provide sufficient social protection to workers, 3. To encourage industry to move up the value chain by investing in higher technology and increase labour productivity, 4. To reduce nation’s dependence on unskilled foreign labour. 18
  19. 19. Essentially the debate on minimum wage hinges on,  Workers want a minimum wage as a means to increase wage levels to provide sufficient purchasing power to enable a worker to have a basic standard of living  Employers reject it as an increase cost of doing business and hurt competitiveness.  The government aim to develop the country into a high-income nation and fully developed by 2020.  The impact on employment, training & productivity, inflation and the country’s competitiveness. 19
  20. 20. For Against Unions (MTUC), NUBE ASLI Centre for Public Studies FMM, MEF, IDEAS 1. Workers wages has been suppressed too long although labour productivity grew by 6.7% annually 1. Wages should be governed by market forces 2. Inefficiencies and ineffectiveness of the existing wage determination mechanisms 3. No increase in productivity level 3. Minimum wage protects particularly those employees who work in low-wage sectors 20 2. Possibly lead to higher unemployment 4. Some 200,000 micro business owners will close shop since could not afford to increase workers salary
  21. 21. PROs CONs 1. Fulfillment of basic human rights 1. Uneven wage distribution 2. Happy workers are productive workers 2. Increase of unemployment 3. Denial of rights at workplace 3. Better bargaining power for workers 4. Outsourcing 4. Promote pay equity 21
  22. 22. Possible Impact on FDI 1. Factors other than wage costs are more important for FDI inflow > > > > Employment protection > Labor taxes Productivity > Skills Protection of property rights > Low corruption Ease of market entry and exit 2. May impacts on new FDI and on many foreign-owned firms in Malaysia but likely to be limited. 3. Low productivity FDI firms represent one-third of all FDI, but their total fixed investment accounts for only 9.9% of all fixed investment in Malaysia. 22
  23. 23.  Possible disadvantages of a minimum wage Although the government are now committed to legislate the minimum wage, there are still plenty of economists who believe that setting a pay floor represents a distortion to the way the labour market works because it reduces the flexibility of the labour market i. ii. 23 Competitiveness and Jobs Firstly a minimum wage may cost jobs because a rise in labour costs makes it more expensive to employ people and higher labour costs might damage the international competitiveness. Rising unemployment worsens the living standards of those affected it has a negative impact on poverty. Effect on relative poverty Is the minimum wage the most effective policy to reduce relative poverty? There is evidence that it tends to boost the incomes of middle-income households where more than one household member is already in work whereas the greatest risk of relative poverty is among the unemployed, elderly and single parent families where the parent is not employed.
  24. 24.  Can a minimum wage actually increase employment? Yes? – depending on the circumstances in the labour market when a pay floor is introduced and also on what happens to the productivity of labour when a high (statutory) rate of pay is introduced. There are two main explanations for the possibility of higher employment i. ii. 24 The Keynesian argument that higher wage rates will increase the real disposable incomes of lower-paid workers many of whom have a high marginal propensity to consume. Thus they will increase their own spending and this will feed through the circular flow of income and spending The efficiency wage argument that raising pay levels for low-paid employees may have a positive effect on their productivity and efficiency. In addition to the psychological benefits of being paid more, businesses may take steps to improve production processes, workplace training etc if they know that they must pay at least the statutory pay floor.
  25. 25.  The importance of elasticity of demand and supply of labour The impact of a minimum wage on employment levels depends in part on the elasticity of demand and elasticity of supply of labour in different industries. If labour demand is relatively inelastic then the contraction in employment is likely to be less severe than if employers’ demand for labour is elastic with respect to changes in the wage level. excess supply 25 the possible effects of a minimum wage when both labour demand and labour supply are elastic in response to a change in the market wage rate. The excess supply created is much higher
  26. 26. Has minimum wage worked? (Based on UK NMW report) 1. Employment: For most of the years since the NMW was launched, unemployment has been falling. The jobless total is now increasing at a rapid rate but the main cause has been the domestic and global economic recession. 2. Inflation: In many sectors firms find it hard to pass on higher wage costs to final consumers – limiting the inflationary effect of the minimum wage 3. Wage costs: The minimum wage affects only a small proportion of workers and the effects on the wage bills of most businesses is not a significant factor in their employment decisions. In the short term, the demand for labour tends to be inelastic with respect to changes in wages 4. Discrimination: The minimum wage has had an impact on the earnings of parttime female workers. 26 5. Productivity: It is hard to identify any strong positive effect on labour productivity - but efficiency gains have been made in most low-paying industries, a trend which started before the minimum wage was introduced.
  27. 27.  Is a minimum wage worth it? Who will hurt most? Case -> if the minimum wage were removed, there might be lower unemployment, but workers might not make enough money to support themselves and their families. Case -> With the minimum wage in place, the employed are able to make more money, but many more workers are forced into unemployment and forced to take welfare, while making no contribution towards national productivity. Case -> Firms will always want skilled workers who can make large contributions to productivity. When the minimum wage is installed, however, it is the least productive workers who are cut from payrolls first. The skilled workers will keep their jobs, perhaps even with higher pay; but the unskilled workers will be unemployed. 27
  28. 28. Three conditions have to be met in order for the minimum wage to have a positive effect on the standards of living of workers and their families, i. Most workers are entitled to receive at least the minimum wage in exchange for their work. No workers or very few workers lose their jobs because of the minimum wage. Or in a case where job losses are entailed, workers can find another job, i.e. the economy is growing and some sectors are creating jobs. ii. Employers comply with the minimum wage. Compliance with the regulations implies both that employers are organized and have been consulted during the minimum wage fixing process and that there is a wellfunctioning mechanism to enforce the regulation, such as a labour inspectorate. iii. There is no increase in prices following the rise in the minimum wage. 28
  29. 29. Minimum wage legislation should be used as an instrument to remove imperfections in the labour market and not meant to be used as an instrument for achieving development plan objectives because by itself it is a lame instrument and is an inappropriate instrument to address poverty. For Malaysia – Minimum Wage will act as means, • to intervene the market – main justification for minimum wage • to address inefficiencies (imperfection) in the labour market • to reduce nation’s dependence on unskilled/ cheap foreign labour. 29

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