“The main problem confronting the poor is that they have too little money” – Abba Lerner
And that is exactly why I feel a minimum wage policy, however well intentioned, is not the right policy. With regard to helping the poor, it is a third best policy.
To make it clear, lets see a classic economic argument against the minimum wage. I find the need to do this as I suspect most are confused about the topic.
Here, we will assume that everyone wants to work regardless of wage (The most favourable assumption, any other would worsen the negative impact of the minimum wage.)
If we let the market operate, employers (be it MNCs or your local wet market) will employ everyone who wants to work, leading to a overall market wage.
(Unemployment would still exist here for various reasons e.g. those fresh from university looking for their first job etc, but to simplify things, we assume that is negligible)
Now, if we set a minimum wage, employers will employ less. That is inevitable. The law of demand dictates that.
They will fire workers, and squeeze out more from the remainder.
So who wins?
Not the newly unemployed, whom now have to find some means to live on. Most certainly not the employers
Maybe the lucky few whom are employed. But that is equivalent to the lucky poor stomping on the backs of the unemployed poor. Somewhat counterproductive for a policy aimed at helping the underprivileged.
Much better would be a public works program to increase the demand for low-skilled workers, thus raising wages for all. Alternatively, a negative income tax, helping to subsidize those whom find themselves working below subsistence levels. Either of this would be much better than the minimum wage, which is really an ineffective way of putting money into the pockets of those whom need it most.
Now to answer some arguments for the minimum wage.
Firstly, the point that it would raise the incentive to work. No one denies that one would work harder if he is paid more. Hey, I would! The main issue is whether anyone would employ you for said wage.
A related argument is that it would encourage efficiency in employment. Yes it would, as employers try to squeeze out more from the thinned ranks of the employed. So we have overworked workers and those whom want to work but cannot. Is that what we really want?
And for the fact that it would discourage foreign workers from entering Singapore through various means, there are so many more direct measures to stop this, e.g. increasing the foreign worker levy etc.Why do we want to settle for second best measures?!?
This is like cutting off one’s nose to spite the face.
Thus, while it sounds really popular, I really don’t think we want to use the blunt axe of a minimum wage to achieve our social objectives, be it helping the poor or discouraging immigration.
[...] minimum wage: A full analysis can be found here, but in short, a minimum wage will lead to wage rigidity, putting more of those who desperately [...]
Pingback by A quick reaction to the SDP shadow budget « On Nation and State — February 17, 2011 @ 3:23 pm
Not sure if this may or may not be the best option, but definitely sure that our FT policy is the worst option.
Just came back to sg from the airport last night, and was greeted by FTs working in Changi Airport! The argument of getting foreign talent just flew out of the window! We have the best airport in the region, and it is Singaporeans who make it that way. Now, CIAS replaces these proven S’poreans with unproven third world immigrants with no experience in running 1st class airports, where is the logic? Where is the wisdom?
We should set a min. wage for FTs instead, make them expensive, and only as an employee of last option or of REAL TALENT, not to make up the numbers!
Comment by hahaha — September 22, 2010 @ 2:43 am
You supply/demand curve appeared very reasonable at first glance, I have a hard time finding the flaw, which I know must be there. But, I was not to be defeated.
So, what is the flaw? Simply your assumption of “one” wage as a result of intersection between supply/demand.
But in the real world, we know there is a huge range of wages, from million dollars CEOs to less than $5/hour cleaners.
Looking from the perspective of supply/demand curve, the intersection is not a dot, but a large fuzzy region (the greater the income disparity the large the region).
In this context, setting a minimum wage will cut the lower portion of the fuzzy region, which will eventually leads to a new equilibrium fuzzy region that is smaller and sit at a higher wage level.
Comment by abc — September 21, 2010 @ 5:45 am
Actually, the graph does not assume ‘one’ wage for all. This is a demand-supply graph for a particular labour market, say toilet cleaners. Again, you may argue that different organisations may pay their cleaners different wage rates, but the graph is drawn in this manner to simplify things, so as to illustrate the concept/theory clearly. The whole point which the blogger is trying to make here is that, with a minimum wage policy, the ‘winners’ (those who remain employed with higher wages) win at the expense of a possibly larger group of ‘losers’ (those who become retrenched), and thus based on cost-benefit analysis, minimum wage is at best a blunt axe.
Comment by Lee Jun Hui — September 22, 2010 @ 1:20 pm
In my rush for a general illustration, I have neglected precision.
Yes your point is valid. But the same argument will apply to each individual market, leading to the same result. So the conclusion is unaffected.
Take the market for dishwashers for instance. If we implement a minimum wage above the market price, employers will still fire. Unemployment will still result.
Sure, the unemployed could work in another market. But we are talking about a general minimum wage here, so the newly unemployed will also find difficulty looking for work in other markets.
The end result? Tonnes of unemployed.
Incidentally, the CEOs aren’t affected at all, as the minimum wage is far below the market equilibrium for their work. Thus, the rich remain the same, while the poor get worse off.
More inequality, anyone?
Comment by Some group — September 22, 2010 @ 1:25 pm
The supply curve is artificially inflated due to the huge influx of foreign workers. Imposing a minimum wage would cause the demand curve to shift. Net gain to local workers may still be positive if the supply curve were shifted to the left. Or would it shift to the right given that even more foreigners would want these jobs and the government let’s them in..
Comment by Sgcynic — September 26, 2010 @ 6:50 am
How to increase demand for low-skilled workers, when automation and technology will continue to march forward?
Negative income tax is just another form of minimum wage system, except that it’s society/taxpayers subsidising corporations and companies while getting nothing in return.
Comment by Heng-Cheong Leong — September 21, 2010 @ 4:45 am
Apologies for the confusion, I believe that I was referring to a negative income tax for citizens, not firms per se. In which, government will pay taxpayers earning below $X an amount that decreases with income.
That cant be said as a policy with “nothing in return”, can it?
And I do not think technology will wipe out low-skilled jobs completely. Technology has and will create new low-skilled jobs, however menial they may be.
What we cannot do, is to be Luddites and halt technology. We must instead help the poor live in such a world.
And I think, a negative income tax would thus in this sense help them adjust.
Comment by Some group — September 22, 2010 @ 1:09 pm