Category: Economics

Categories
Economics Mudslinging

[2544] Responding to Ahmad Fuad Rahmat on minimum wage

Ahmad Fuad Rahmat wrote a short essay in support of minimum wage.[1] While there may be a number of reasons to support minimum wage, I believe he misunderstands some issues and mischaracterizes others while he attacks the anti-minimum wage camp.

He first and foremost takes issue with Wan Saiful Wan Jan’s statement that ”when employers refuse to hire at the minimum wage, desperate workers will look to the black market and agree to take less than that,” as reported in The Malaysian Insider.[2]

The statement on the black market is not mere theorizing. Any student who has attended universities in major cities where minimum wage law is in place will know somebody who has worked illegally below the minimum wage. It is especially a prevalent issue with international students, despite having a study/work visa. I personally know a number of students in Sydney whom worked below minimum wage. That alone is illegal. The illegality by definition adds up more workers in the black market as far as the minimum wage law is concerned.

The concern with the black market is not merely a definitional issue. That illegality will reduce protection these workers may get as compared to if they are legally employed. If you are a foreign worker, then it will be a double-whammy, and therefore, very oppressive. As you can see, the socialist policy is not compassionate it is cracked up to be. Utopia and the real world are two very different things.

That is not to suggest immediately that desperate workers will go into the black market in the sense of trading contrabands (or mafia-linked trades). No, it is not.

To repeat, minimum wage adds to the black market only because workers, possibly working as completely innocent occupation as store assistants at legal business setups, work below the minimum wage.

Ahmad Fuad Rahmat takes exception to that and counters that ”increasing the minimum wage to a level that secures the basic needs of a household will make it less likely for people to want to search for subsistence elsewhere.” Read his article and you will get the idea that he misunderstands the context of the black market as the one that trades contraband (or mafia-linked trade) instead of the one where one is employed below the minimum wage. I know the definition used by Wan Saiful Wan Jan because in an email discussion, I mentioned the issue about minimum wage and the black market to him.

As you can see, I am compelled to respond because the idea came from me. Else, I would not have bothered to reply.

And of course, increasing the minimum wage to a very high level will lead to higher unemployment rate. That means no wage at all for the unfortunate. There is always trade-off. There is nothing controversial about that. Put minimum wage at RM2,000 for instance, then you will see massive unemployment rate in the legal sector, and more workers in the black market.

Once you understand the economics that raising the minimum wage will add more workers to the black market, you will understand why raising the minimum wage even further will add more workers to the black market. When Ahmad Fuad Rahmat suggests that raising the minimum wage will discourage worker from participating in the black market, you know he does not understand the issue at hand. Again, he misunderstands the context of the term black market. And since he does not understand it and then goes on to prescribe a misleading policy, his argument should be ignored.

Immediately after the issue of black market, he referred to a so-called classist supposition that ”minimum wages decrease productivity is just false.” It is indeed false.

There is something that is called the efficient wage where a worker is paid slightly above the wage that his productivity warrants. With enough supervision (i.e. the probability of getting caught shirking and losing his job), the worker will appreciate his job and not shirk in fear of losing his relatively well-paid job. Henry Ford was famous for practicing efficient wage policy. Note that Ford was no government.

I do not know who actually makes the point about decreasing productivity as claimed by Ahmad Fuad Rahmat. But I think those with liberal economic understanding do not make that argument at all. The closest sensible argument from the liberal side that comes close to the argument the author puts up and then attack (strawman argument perhaps?) is that productivity will lag behind the minimum wage due to stickiness in the market as the market takes times to react changes. Note the concern: it is not the decrease of productivity but rather, lag of productivity to wages.

In any case, minimum wage and efficient wages are two different things set in two different contexts. Efficient wage is set within firm settings while minimum wage is set at the national or macro settings. Efficient wage can be tweaked at the firm level according to level of productivity of individual workers by managers with full knowledge of his firm. Minimum wage, especially Malaysian minimum wage, does no such thing because it suffers from aggregation problem; it cannot be as specific as efficient wage.

Ahmad Fuad Rahmat goes on to cite an author confirming the existence of efficient wage and use that as an argument for minimum wage. Just as he misunderstands the issue with minimum wage and black labor market, he jumbles up the concept of efficient and minimum wages together, and the uses the points in favor of efficient wage for minimum wage. Maybe the author that Ahmad Fuad Rahmat cites also confuses the two concepts together. If you correct the foundational understanding, the subsequent policy prescription must change accordingly. So, because of the misunderstanding of issues and concepts, his prescription should be rejected because it is derived from flawed understanding.

There is yet one more point in his essay and this is empirical in nature. Ahmad Fuad Rahmat states that ”it is also widely understood that many plantation workers in Malaysia are still being paid around RM400 per month.” I am unsure what he means by “widely understood” or “many” but if he means to say a large fraction of those in the plantation industry, I fear he is mistaken.

In the plantation industry, there is a shortage of workers. Indonesia is giving Malaysia a real fight in terms of wage competition in the plantation sector. An analyst friend of mine whom job is to monitor the plantation sector and recommend investment in plantation companies contends that workers in the industry are already earning above RM1,000 wage as plantation companies in Malaysia struggle to attract workers. In fact, do not take my words for it. Sime Darby, the largest plantation company in the world:

In an unprecedented move, Sime Darby Plantation Sdn Bhd (SDP) has increased the salaries of 37,000 of its estate and mill workers throughout the country, with each of them expected to earn an extra RM200 in basic salary effective July 1.

”¦

With the new salary scheme in place, a rubber tapper to a clerk, including auxiliary police personnel, employed in the estates and mills will enjoy a basic salary of between RM1,050 and RM1,100 per month. [Sime Darby Plantation increases salary for 37,000 workers. The Borneo Post. June 7 2011]

So, that are three counterpoints: two to clarify his misunderstanding and another a challenge on his data.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
[1] — Prime Minister Najib Razak’s announcement of a minimum wage requirement for the private sector has been met with outrage from pro-business Malaysians.

Their argument, in short, is that there should be no minimum wage at all. A minimum-wage policy will only increase business costs, which will only lead to inflation. Companies will also be reluctant to hire more workers as a result.

IDEAS director Wan Saiful Wan Jan even went so far as to say that the new minimum wage policy will eventually compel workers to turn to the black market in search for employment. He thus describes the policy as nothing short of an ”intervention” in the name of ”populism” — a clear breach of the natural process of growth that a truly free market would assure for everyone. [The case for increasing the minimum wage. Ahmad Fuad Rahmat. The Malaysian Insider. May 4 2012]

[2] — ”When employers refuse to hire at the minimum wage, desperate workers will look to the black market and agree to take less than that,” said Wan Saiful Wan Jan, chief executive of libertarian think-tank Institute for Democracy and Economic Affairs. [Minimum wage will cause unemployment, inflation, say employers, economist. Shannon Teoh. The Malaysian Insider. May 3 2012]

Categories
Economics Society

[2543] Safety bought through ransom is a cost to society

Amid the political wrangling on Bersih and its aftermath, a son of two expatriates living in Kuala Lumpur was kidnapped. The kidnapping of Nayati became a minor sensation. Twitter was abuzzed with it. Posters were put up across the city and flyers handed out. Just outside of my office in Damansara Heights, just by the busy road, somebody hang a large poster of Nayati, appealing for information and help. Judging by the impressive and expensive effort, the parents are well-off.

He was found later outside of the city in Rawang and it was reported that the parents paid the kidnappers some unknown ransom.

I am glad Nayati was found and I am glad he is safe.

Nevertheless, it must be highlighted that Nayati is one person. The more important fact here is that we live in a society. The handling of the case gives signal to the society. That signal will inform future decision of both victims and criminals.

The “ransom solution” creates an expectation on the side of the criminals that crime pays. That creates adverse incentive.

When the incentive is big enough over the cost of crime (either through the increase of actual payoff or the higher probability of payoff), we can expect greater occurrence of kidnapping in the future. The ransom solution will create a systemic problem and it will make the society less safe.

For Nayati’s parents, the police may have helped them. Nayati’s father has thanked the police. In fact, if I were the father, I would thank the police for their aid despite paying off the kidnappers with my own money. In tough times, any help will be appreciated. And I do not blame the parents for paying off the ransom. No money worth more than the life of your loved ones.

But, from societal point of view, such emotional attachment should be stripped in favor of pure rational economic analysis.

When it is stripped, then the incentive structure will tell us that each ransom solution represents a failure of the societal institutions.

Any safety bought through ransom is a cost to the society as a whole. Call it negative externality; each time you pay, you may make somebody else worse off.

So, from societal perspective, the Nayati case is a failure. It will continue to be a failure until the kidnappers are caught and sufficiently punished to tell everybody that crime does not pay.

Categories
Economics

[2542] The ageism of minimum wage

In general, minimum wage affects the labor market negatively. At some level, it will increase the unemployment rate. That may happen either through direct disemployment as employers struggle to meet the cost, or through the freezing or insufficient job creation growth as the labor force increase. Whatever it is, I believe the relationship between minimum wage and unemployment rate is relatively well-publicized and many who are serious about the issue do know of the relationship. The lay proponents of minimum wage still promote their policy but they do know that relationship is a wall to scale.

There are other less publicly known effects. Discrimination against small firms is one. The adverse impact on low-skilled workers is two. There are others.

Here is another and it is the distribution effect across age.

Consider two workers of the same skills. Worker A is 25 years old. Worker B is 50 years old.

Both qualify for minimum wage.

If an employer had to choose between the two for a low-skilled job, which would the employer employ?

Without hesitation, I would take the younger one if I was the employer.

Between a 25 years old and at 50 years old, it is very likely that the 25 years old will be the preferred choice of anyone with profit-motive. He is young and that means he has better health than his older counterpart in general. There are other factors of course like attitude and initiative (if the particular person in his 20s is a damn punk and the 50 years old person is a nice old lady, I will employ the lady) but there are many reasons to think that an employer can squeeze more productivity out of the young worker than out of the older worker for a given wage, on average.

For those who know their economic jargon, then that means the younger worker offers better marginal product than the older worker will on average. In simpler terms, the younger worker offers greater productivity than the older worker.

How about experience? Surely experience works in favor of the older workers, right? Remember however that low-skilled jobs require little training. The kind of jobs requires no or little experience. That effectively discounts experience as a consideration.

When one pays a person according to his or her productivity without any restriction on compensation, then one can employ anybody up to any number until your last marginal product of labor is no longer positive. Note the causality: your productivity determines your wage. The first determination is your productivity and your wage is a function of your productivity.

Under minimum wage, the wage is the first determination and your productivity now is a function of your wages. Here, wage is the first determination because an employ know his cost and he will want to find workers with the productivity that matches the cost that is minimum wage. This immediately limit the kind of workers that the employer will employ.

Now, go back to the productivity of the young and the older workers mentioned in the beginning. Older workers will have lower productivity to younger workers. That is an immediate disadvantage in terms of employability in the age of minimum wage.

I think this point is important because a lot of younger workers do not really need a job. Many are out of school and are merely looking for extra pocket money to have some fun. These young workers will qualify for minimum wage. They do not need the jobs. The jobs are merely summer job so-to-speak, not necessarily part-time too.

Compare this to older workers who qualify for minimum wage. This type of older workers will likely need the minimum wage jobs more than the younger workers. They are in it to survive.

Controlling for everything else, minimum wage can hurt the workers that, arguably, the policy of minimum wage is supposed to help. Yet, the policy hurt those that it is set out to help.

Categories
Economics

[2531] PEMANDU and its real significance to private investment

PEMANDU claims “confidence from the ETP saw private investment hit RM94 billion and RM131 billion worth of GNI generated in 2011.”

A bold claim.

Let us see the trend of private investment in the last 11 years.

Do you see anything special about 2010 and 2011?

What I see is only a reversion to mean. What I see is that there is something in the economy that causes that. That something is bigger than PEMANDU.

Note also that in 2009, there was a severe recession. What that means is that there was a temporary disruption, and the subsequent recovery was just a reversion to mean (i.e. delayed investment planned before the recession, or just typical investment that happens as the economy goes along that requires no further incentive), not because of PEMANDU.

Yet PEMANDU claims that it is the cause.

You know when PEMANDU can make that claims of theirs? When those points are significantly above the line. That will probably happen in 2012 or 2013 with the construction of the MRT. Until then, no.

The figures for private investment can be verified by consulting the Bank Negara’s Monthly Statistical Bulletin.

Categories
Economics

[2529] Malaysian household income evolution by ethnicity, 1970-2009

There are a lot of conversations about income these days. In Malaysia, the conversations also get a bit racial sometimes. But how did it look like over the past years?

The following describes the average Malaysian household monthly income (pre-tax) according to ethnicity:

This is in nominal ringgit, i.e. it does not account for inflation.

I believe this (the total series) should be read with my entry on 2010 average household expenditure (which states that average nominal expenditure was RM2,200) and the 1999 average household expenditure according to income class. That is especially so to clear up the disagreement about saving and investment that was brought up in the comment section of the former entry,  i.e. expenditure does not equal income and that means saving or investment activities are not included as part of expenditure. As you can see, 2010 expenditure for an average Malaysian household was about RM2,200. Compare that to the 2009 income, which was RM4,000. The more or less RM1,800 difference between the expenditure and income is likely either saving or investment.