Tag: minimum wage

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

[2521] Subsidizing wages and business incompetence

In any kind of policy debate, there are always two elementary opposing opinions at work. One side subscribes to the ability of the state to produce outcomes better than society can if society is left to itself. The other is not so sure of that and prefers to err on the side of caution, ever mindful human fallibility. One is confident. The other is humble. Beyond opportunistic politics, that has always been the background behind the minimum wage debate in Malaysia. This tug of war in fact has been on the forefront of any general modern economic debate.

The side preferring the organic solution fears that the initial government intervention in the workings of natural everyday life will lead to unintended consequences that in turn will lead to further government intervention. From one preferred outcome supposedly guaranteed by the intervention, a very different reality will emerge to contrast our overconfidence in our ability to control everything that even the gods appear to struggle at times. From there on, more and more unexpected expensive tweaks are a must not only to push towards the preferred outcome, but also to make sure the post-intervention scenario is not worse than the status quo.

The unintended consequence of minimum wage is always higher unemployment among the general public compared to an economy sans minimum wage, whether one does not know of it, or one decides to consciously swallow up the trade-off wholly.

Call this a tired argument from a free-market advocate, but it is true no matter how old the statement is.

The nuance is that unemployment effect depends on the level of minimum wage. At the proposed minimum wage level in Malaysia which The Star has reported to be between RM800 and RM1,000 however, that qualification is academic. If it was low enough to have negligible effect on unemployment (or the cost of doing business, which is the other side of the coin), there would have been no real complaints to be made.

Now that government intervention is imminent, the trade-off is taking the limelight while previously it was ignored. There are calls to grant businesses some flexibility to adhere to the fiat from both sides of the aisle in the national Parliament.

Of particular note is a suggestion from three prominent members of Pakatan Rakyat — Rafizi Ramli of PKR, Liew Chin Tong of DAP and Dzulkefly Ahmad of PAS. They suggest that the government subsidizes businesses so that transition will be smooth. The Malaysian Insider quoted DAP lawmaker Liew Chin Tong suggesting, ”Funds from the federal budget should be allocated to a special facilitation fund to help entrepreneurs, SMEs and small firms retool, mechanize and adjust their operations to create new job. This is to address concerns of most SMEs that the minimum wage will make these businesses close down.”

Although the next step from here is unclear, the mood from both sides of the divide creates a suspicion that the government will intervene once again after the introduction of minimum wage on the pretext of a smooth transition.

In the context that the Najib administration has been copying policies advocated by Pakatan Rakyat quietly while publicly deriding the same set of policies as the height of irresponsibility, the suggestion from Pakatan Rakyat in particular is disconcerting. One has to remember the federal government only began to champion the minimum wage policy seriously after Pakatan Rakyat successfully placed the issue under the spotlight. Given the popularity of Pakatan Rakyat on this front, it is not too farfetched that the government will play the copycat yet again.

Already businesses, big and small, are heavily subsidized no thanks to various industrial plans put into effect by the federal government. Now Pakatan Rakyat wants a policy that will exacerbate the expensive incentive-twisting policy in time when what Malaysia requires is improvement in its efficiency. That efficiency, among others, requires businesses to stand on their own two feet without financial support from the government.

If this subsidy goes through, the next round of unintended consequence will be the creation of mostly incompetent businesses utterly dependent on government handouts. Look at some of the loss-making government-linked companies which are dependent on government largess and protection.

Now, imagine that economy-wide.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved
First published in The Malaysian Insider on March 18 2012.

Categories
Economics

[2513] Minimum wage and the money illusion

In the short run when (nominal) prices are not so flexible, there will be a trade-off between (nominal) minimum wages and unemployment rate. The mechanics is simple. If businesses cannot change the price they charge their customers, they will optimize their cost. Since a person’s real wage theoretically equals the person’s marginal product of labor (or in English, productivity), businesses will try to maintain workers whom are reasonably productive with respect to the wage paid. In reality, this could mean either tighter selection of workers or even firing of unproductive workers. More often than not, it would likely only lead to tighter worker selection criteria. Regardless, with labor population growth, it would lead to lower hiring compared to pre-minimum wage and then immediate creating  greater unemployment among the labor force, with all else being constant.

In the long run when prices finally adapt, the relationship between minimum wage and unemployment can be rendered impotent. Prices adapting means erosion of minimum wages by inflation. The more prices adapt, the less productivity is required given the equivalent fixed minimum wage level. This thus opens up more space for less productive workers to have a shot at employment in sector which the minimum wage law covers and in turn, applies a downward pressure on the unemployment rate.

Unless, of course, if the minimum wage level is updated in line with some measure of inflation. In that case, the negative relationship within minimum wage and unemployment rate will be sustained.

There is one important point that I wish to highlight if it is not so apparent already. While the negative relationship between minimum wage and unemployment will weaken over time in the face of inflation and non-update of the law, the effect of unemployment is real due to sticky prices in the short run.

With a real minimum wage, the effect is permanent.

Categories
Economics

[2294] Of favoring the fat over the fit

The prime minister has said it so many times. His administration wants to turn Malaysia into a high-income country.  One of several initiatives that the administration believes can help in that direction is the introduction of minimum wage through the establishment of the National Wage Council. In promoting its supposedly market-friendly and market-driven policy, the federal government embarks on central planning without even flinching at the contradiction. For others, they will do more than flinch because as with any effort at central planning, there are side effects. One of them is the creation of an uncompetitive market.

In the free market, some firms have more market power than others do. That is inevitable due to various factors that are only too natural. Some are just larger than others are and they may have better access to resources and may be able make use of it more efficiently than others do, thus allowing them to sustain their prominence in the market.

That, however, does not prevent smaller firms from competing against their larger counterparts in the same industry successfully. There is enough flexibility in the free market to enable smaller firms to succeed. That flexibility creates free competition and that competition in the free market exacts punishment on mistakes made by anybody, even by larger firms. It gives others the opportunity to rise up.

This competitive force may no longer be true if the wage council dictates wages. The focus here is not the minimum wage itself but rather, the mechanism at which the council dictates the wage.

Consider the possible composition of the wage council. For it to be truly representative, it has to have all stakeholders in the labor market represented. This includes firms of all size and industries. There will be representatives from the labor unions and the government as well.

Consider now the interest of each side given an industry. The government wants to turn Malaysia into a high-income nation and believes the introduction of minimum wage can help. The labor unions want higher wage for its members and are strong advocates of minimum wage. The larger firms do not like competition and can afford higher wages. Finally, the smaller firms do not like competition as well but unlike the larger ones, they cannot afford to pay the kind of wages that the larger firms usually can.

One can see that at least one aspect of interest of the government, the labor unions and large firms coincides and then competes directly against the interest of small firms. Given this setup with the wage council, smaller firms are likely to lose out.

What begins as a problem of low wages or wage stagnation — what has been the rationale for the proposed formation of the wage council and the introduction of minimum wage in Malaysia — that is partly caused by unequal bargaining power between employers and employees is transformed into something else. It turns one problem into another.

While it attenuates the difference between employers and employees, the council amplifies the bargaining power differential between firms. The incentive mechanism of the free market is tweaked, or rather mangled, to give more leeway to larger firms to make mistake and less for smaller ones.

To put the implication more starkly, the wage council encourages the creation as well as the continuance of monopolies in the market. It creates an uncompetitive market, on top of the inflexibility created by the minimum wage policy.

What makes this all the more unpalatable to those who actually believe in market-driven policy is that many pre-existing monopolies in Malaysia are government-linked companies while the smaller companies are likely to be privately held. And when the monopolies are not government-owned, many of these monopolies came to being not because they were competitive, but because of past government policies of lemon socialism that privatized profits but socialized losses.

The concern for lemon socialism and privately-owned monopolies aside, the dynamic of the wage council is stacked against privately-held companies in favor of larger as well as government-linked companies. The role of the state in the market increases with the establishment of the wage council.

This is an example of Najib administration’s supposedly market-driven policy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on December 28 2010.

Categories
Economics

[2265] Of does minimum wage discriminate poor entrepreneurs?

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.