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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]

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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.

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Photography Politics & government Society

[2541] He wants a clean election

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Sports

[2540] Here is to the 31st Eredivisie title

This season has been an amazing one for Ajax. Ajax had to fight really hard to get where it is right now and that is number one.

Too many times, the prospect of a spot in the highly lucrative Champions League that is important to the financial health of the team was increasingly distant. AZ Alkmaar, FC Twente and PSV Eindhoven dominated the top spots while Ajax lingered below. It was frustrating.

The sign showed that the Dutch Eredivisie was no longer a division dominated by the Big Three: Ajax, Feyenoord and PSV. It has been so far several years now but this season has been the most competitive as far as I remember. AZ and Twente had sealed their reputation. Their previous years performance was not just a temporary luck. It was a permanent boost that made the two deserving of respect.

By mid-season, Ajax was fourth in the Eredivisie, 5 points behind leader AZ Alkmaar and just 2 points above Feyenoord. By the end of February, Ajax was fifth with even Heerenveen was placed above Ajax. The only saving grace was that Feyenoord squatted the sixth rung. Yet, Feyenoord beat Ajax 4-2 in January. The more painful defeat was back in November when FC Utrecht beat Ajax 6 to 4.

Things only started to turn around late in the season as the latter stages of the Champions League and the Europa Cup were underway. Ajax performance in the Champions League and later in the Europa Cup was disappointing. I personally thought Frank de Boer, despite being an Ajax legend and despite his stewardship that brought the title back to Amsterdam in the last season.

But the exit had a silver lining. It allowed the team to focus on the domestic league while others were still busy with European competitions.

It was during this time that PSV did terribly and suddenly found themselves quickly discounted from winning the crown. Ajax meanwhile scored 12 straight wins since February. That included 2 wins against PSV and Twente.

And yesterday, Ajax effectively won the Eredivisie from the 31st time. It is still not official because with two games remaining, only 6 points separate Ajax from Feyenoord. But with over 53 goals difference and Feyenoord having only 29, Ajax definitely can lose the final two games and still win the Eredivisie.

I think the biggest surprise is Feyenoord. The Rotterdammers did very poorly in the last few seasons that it was impossible to hate them. In the last season, Feyenoord finished 10th. This season they may finish second. At worst, sixth. Judging by their fixture, first against Heracles and later Heerenveen, they are unlikely to lose their grip on the second place.

Whatever happening to the Rotterdammers, I am happy. This is the first time in a very long time Ajax won the title in two consecutive years. The last time that happened was in, well, 1995. How appropriate!