I am unsure how seriously I should entertain the current thought I am harboring. I am thinking of something that is absurd at the first pass but on second thought, it is not so. I meant to write this as a satire for The Malaysian Insider in a fashion that I have done earlier but given my tight schedule, I have refrained from doing so.
I fear I might forget this line of reasoning if I do not record it down anytime soon. And so, here it is.
Minimum wage can be redefined as a guarantee of certain level of wages to those who are employed at the minimum wage level at a firm covered by the minimum wage law. Consider an economy-wide minimum wage law that typically covers low-skilled employees.
In that case, the law discriminates between those who work as employees and those who work by themselves. This statement can be stated more convincingly as a comparison between, for example, a security guard (essentially a low-skilled employee) and a pisang goreng (Malaysian-style banana fritters) seller. Let these two individuals have the same expected income from their economic activity sans minimum wage for the employee.
Is there a reason why the security guard deserves minimum wage, but not the pisang goreng entrepreneur?
The discrimination is unfair and unjust.
This of course is not a call for minimum wage for entrepreneurs. That would be ridiculous. This is just to highlight some of the moral deprivations of the policy.
10 replies on “[2265] Of does minimum wage discriminate poor entrepreneurs?”
@Hafiz
Sorry,most of my reading is from international sources. There’s of course zilch on a Malaysian experience.
@Habib
The current labour regime in Malaysia IS market-based, which is probably why we have to learn the hard way that a minimum wage is no answer either. And you might want to check out this year’s Nobel prize winners in economics.
Hisham, I know I’m being lazy here but may you point me to that literature? I find that Malaysian economic literature is harder to come by compared to others, this is especially so after my education and its literature are US-centric.
I’ll read it after I’m done with my papers and thesis.
The labor abuse can’t be solved by introducing minimum wage law. Whatever acts, or amendments to enforce people to follow rules, there will always be people who will not follow the rules.
If people are free, they can choose to leave the jobs and choose the jobs that pay them most (based on their skills and competences), instead of imposing a salary, that possibly he isn’t entitled to.
Enforcing morality only creates dissatisfaction and dissidents.
Give MARKET a chance.
My reading of the literature suggests that the distortionary effects of a minimum wage are either non-existent or small when close to the market clearing wage, but get progressively bigger as it gets higher i.e. the response is non-linear.
I think a minimum wage around RM700-RM800 would have at most a small impact on unemployment, but there would be serious consequences if we followed the MTUC’s demand for RM1200.
Heh, there is probably one more exception – monopsony. But I doubt anybody would make that argument with respect to the labor market in Malaysia.
But with respect to Malaysia and the typical case, I’m unsure how the minimum wages would be lower than the equilibrium. It’s possible that we are already at equilibrium and the minimum wage is likely to be set above it.
Only – and this is a crucial point – if the minimum wage is set above the market clearing wage. If it’s set below, then there should be no distortion of the labour market.
Why bother in that case? To reduce labour abuse.
I agree with Hafiz that minimum wage distorts the market and interrupts its equilibrium.
Hafiz, I’m not arguing for a minimum wage – I think its proponents are confusing cause and effect. High income economies have minimum wage laws not because a minimum wage promotes high income, but because a high income economy marginalises the poor and less able.
But if CEO compensation is market determined, then it’s a failed market. For instance:
http://www.nber.org/papers/w15987
I see no problem with that because it is not imposed by some law. In other words, it is market-determined, making it morally neutral from macro perspective. No central planner to be judged.
Minimum wage is however it externally imposed. Because it is imposed exogenously, (meaning the government chooses it) it is subject to moral judgment from the same perspective. There is a planner to be judged.
Furthermore, with respect to CEO or anybody’s wage as determined at the micro level, the differential does not immediately or necessarily mean injustice. There are various factors, like difference in quality, size, etc
Minimum wage of course ignores that and as explained, is unjust immediately.
Try looking at it the other way as well – why is there a difference in compensation between CEOs in big companies (or small ones for that matter)?
Aren’t their jobs roughly the same?
In other words, why are there stark differences in the returns to the entrepreneurial function?