“If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three opinions.”
The debate on a universal minimum wage has caused quite a stir in our local political scene as of late.
Member of Parliament Jamus Lim, who is an advocate for minimum wage, has continuously been pushing the ruling party to adopt a universal minimum wage policy.
Sensing that the Government’s policies have always valued efficiency over equity, the Workers’ Party member said in his maiden parliamentary speech: “In as much as we have indeed progressed over the past few decades, the gains of this progress have not been equally shared across society.”
Fair enough, he wants to push for an enhanced social safety net for the lower-wage group, something that I would gladly support.
However, is having a universal minimum wage the policy to narrow the income equity gap?
Experience with Minimum Wage
Just for the record, I used to be pro-minimum wage myself, but these days I find myself conflicted about its ideology.
Australia is a fine example of an economy that has a minimum wage policy in place, and it is currently stipulated at AUD753.80 per week, for a 38-hour week, or AUD19.84 per hour.
My experience with minimum wage was a personal one. I was one of those fortunate enough to be able to complete my tertiary education overseas Down Under.
During one of my extended-term breaks, instead of making the trip back to Singapore like many of my course mates do, I chose to seek part-time employment at a local postal office.
Back then, the hourly wage was also good. So good in fact that it took me years to earn in Singapore anywhere close to what I was getting in Australia.
At AUD19 per hour, if I were working an eight-hour day, five days a week, I would have made AUD760 per week, or more than AUD3,000 a month.
Not too shabby for someone who was sorting mails and parcels for some extra cash.
So, I should stand for minimum wage, yes? Think again.
Minimum Wage Increases Cost of Living
In the book Minimum Wages by David Neumark and William L. Wascher, they stated: “… The limited empirical evidence consistently indicates that increases in the minimum wage lead to increases in prices of goods and services produced with low-skilled labour.”
While many other studies will refute this, I beg to differ.
I believe that the national minimum wage policy has a trickle-down effect – passing increased costs from businesses down to consumers.
On hindsight, while earning AUD19 per hour sounded good in my youth, a simple meal at a food court (hawker centres aren’t exactly a thing in Australia) cost me around 10 dollars back then.
When I think about day-to-day spending, the cost of living in Australia was already relatively high compared to Singapore.
Sure, there could have been other forces at play, such as high Government Service Tax (GST) and inflation, that led to high prices of goods and services.
But if you are paying close to $20 an hour for someone to scan your items at a supermarket, revenue to cover those costs and the employee’s wage has to come from somewhere.
Minimum Wage Increases Unemployment
Many will argue that we are not talking about that kind of wage increase – a minimum wage of $1,300 will roughly equate to an hourly rate of $6.77 based on a 48-hour workweek.
So let us assume that I am an employer in the restaurant business. I have $10,000 set aside every month to pay my eight employees $1,250 each (10,000/8 = $1,250).
If the Government then decides to legislate a universal minimum wage of $1,300, my $10,000 can no longer hire those eight employees. It would end up costing me $10,400.
As a business owner, I have two choices. Either I pass this cost down to my customers, or I can try and make do with seven employees instead.
In another study by Neumark and Wascher, they found that of the hundred-odd studies they have seen, about two-thirds yielded adverse employment effects of the minimum wage.
“… Only eight give a relatively consistent indication of positive employment effects. In contrast, of the 33 studies we identify as providing the most reliable evidence, more than 80 per cent point to negative employment effects,” they said.
Minimum Wage Lowers Future Earnings
In a research paper by David Neumark and Olena Nizalova, they found that exposure to minimum wages at young ages also had long term effects on these workers.
They said: “Among the possible adverse longer-run effects are decreased labour market experience and accumulation of tenure, lower current labour supply because of lower wages and diminished training and skill acquisition.”
And if you think about it, it does make sense.
How often have we as employees become complacent once we are comfortable with our salary?
We start delaying skills acquisition, putting off training because we do not see the need to do so.
The lack of training and skills in a workforce will eventually lead to inefficiencies. These workers will consequently end up stagnated or unemployed.
No Free Lunch
As the saying goes, there is no such thing as a free lunch. The money that goes into increasing workers’ wages must come from somewhere, and someone will need to bear this cost. This will, in turn, lead to one of two consequence.
Either cost of living will go up (which will also negate the effects of minimum wage), or businesses will reduce costs by hiring fewer workers, thereby increasing unemployment.
According to John Phelan, an economist at the Center of the American Experiment, the only way to boost wages is to boost worker productivity.
Instead of just going against market forces and artificially raising the wage floor, we ought to justify that increase with productivity.
It is pretty much like how you would go to your employer and ask for a raise. If you have not increased your skills, productivity or efficiency, how do you justify the raise?
The Debate Continues
I can probably cite you 10 articles that say minimum wage does not uplift the lower-wage group, and someone who believes otherwise can undoubtedly find you another 10 that say it does.
At the end of the day, you need to do your research and draw your own conclusions.
To quote another saying – give a man a fish, and you will feed him for a day; teach a man to fish, and you feed him for a lifetime.
We know that as technology advances, we need to continuously upgrade ourselves to stay relevant.
Then why can’t we see that to truly uplift our low-wage workers, we need to give them the tools to earn more instead of just handing them a higher salary today?