Minimum Wage, Inflation and Unemployment

A few economic literature on the subject of of minimum wage and unemployment:

From Freaknomics - minimum wage decrease unemployment: Link Here

The Austrian school view: Mythology of the Minimum Wage

Graham White 2001. "The Poverty of Conventional Economic Wisdom and the Search for Alternative Economic and Social Policies". The Drawing Board: An Australian Review of Public Affairs, V. 2, N. 2 (Nov.): 67-87.

Excerpt: The view which is adopted here however is that there is insufficient robust theoretical ground to support the notion, underlying virtually all economic discussions of employment, that real wages and employment are related in a systematically inverse way. In other words, the view is adopted here that no clear economic reasoning can be provided by which to suppose that in general a fall in real wages would lead to an increase in labour employment.

 It goes on to say, "Some, particularly economists, might find this rather confronting, since the real wage-employment nexus has been a part of economic folklore for so long, that, to use the words of one economist, this notion is no longer seen as a theory of employment, but as an "immediate reflection of the facts"... vis-a-vis "immediate reflection of the facts": these words are taken from a paper by Pierangelo Garegnani (1970, p. 426-427), which he used in describing the difficulty economists have in disengaging their minds from standard demand-supply conception of markets."

An Incorrect Model?

In an article The Injustice of a Minimum Wage, by John Lee, where he argues: 

"But why do we want a minimum wage in the first place? The answer is simple: we think everyone who works deserves some minimum amount of compensation. Fair enough, isn't it?... It is not immediately clear how it can be just to treat a multinational corporation and a neighbourhood grocery store exactly the same way. The minimum wage is effectively a tax on hiring, except that instead of paying it to the government, you pay it to your employees. And uniquely amongst taxes, the total amount you pay is dependent on how many people you employ — how much you consume. That makes it equivalent to an indirect tax, where the burden falls disproportionately on the little guy... For the neighbourhood grocer, the minimum wage can very well be the difference between staying in and going out of business. For the multinational corporation, paying the minimum wage is probably chump change."

His strongest point are that, (1) if both the employer and employee agrees on a certain wage which is below the mandated minimum wage, why can't the worker be allowed to accept a job if he so desperately needs the job, and the employer cannot afford to pay the minimum wage; (2) We know that life itself is not fair and society is divided into different classes of people while a minimum wage policy treats all people the same, so in effect we do not care about the "differences society has created".

It makes me see the issue in a different light. We Most all want to see every worker getting a decent, minimum amount of compensation (wage). Social justice - most all decent people wants to see, i'm sure.

He also argues giving people in the lower income bracket a tax break (tax deductions, tax exemptions and credits) inversely proportional to their income using tax collected from the taxpayers and corporations. While it is a good idea but will the authority implement this.

There is another view by Professor Moshe Adler. In an interview on his book "Economics for the Rest of Us", he expounds, in layman terms, on the fallacy of conventional economics which most of us have taken them as truth.

Some excerpts from the interview:

He (Adam Smith) explained that bargaining power is determined by the ability of workers to say no to a low wage on the one hand, and the ability of employers to say no to a high wage on the other. Adam Smith explained that your ability to say no to a low wage depends on how much money you have in the bank and on whether you have to accept the job because you must feed your family and you cannot wait to find a high-paying job. If you cannot say no, you will accept the low-paying job. Employers are more powerful in this regard because they have more money in the bank. But Smith also explained that workers can overcome their infirmity by having unions. And he complained bitterly that the government actually always sides with the employers and against the employees, and always uses its state power to put down unions.

And on the question of "supply and demand, and wages will reach the point where people will supply their labor." 

First of all, this idea that there is an equilibrium is the idea that, left to its own devices, a market system will always equilibrate. This means we will not have a recession, and we will not have a depression. And this is something that John Maynard Keynes went against during the Great Depression and basically said, “Look, this is the theory, open the window, there’s the reality.” The reality is that the market is not self-equilibrating. We have unemployment, and we have to recognize that the theory just doesn’t work.

The other side of the same issue is the argument that wages reflect the value of what people produce: as long as people get the value of what they produce, there will be an equilibrium, which means, again, that you will not have unemployment. And therefore we run into this fantasy that any time you have unemployment the reason for it must be that wages are too high. So if you have unemployment the cure for it is lower wages; if you were to pass a law that raises wages this would create unemployment.

The parts in bold emphasized is what economists, student of economics and most of us had been conditioned to believe all these time, from school textbook to the mainstream media.

The link here: Economics for the Rest of Us

A minimum wage policy is essentially a 'price floor'- government price control mechanism which places a legal minimum on workers' wage. In a well-behaved labour market, theoretically of course, there is no need for its implementation as the labour supply (workers supply of labour) and demand (firms demand for labour) will always moved to equilibrium.

In a labour market where there is a minimum wage, if the equilibrium price (wage) is below the minimum wage, the minimum wage is a binding constraint on the market. At this wage level, the quantity of labour supplied exceeds the quantity demanded ie. there are more workers looking for a job than there are firms willing to hire those workers. Therefore, a binding price floor causes a surplus (as shown in the chart at the top). This surplus of labour aka unemployment is the main contention of opponents of the minimum wage.

Then there is the issue of inflation; that a minimum wage will increase inflation (cost-push inflation via increased price of essential goods caused by increased staff cost being passed on to consumers). Fair enough. But conventional economics also said this type of cost-push inflation can be remedied by employer adjusting their workforce to compensate. Other than cost factor, relationship and correlation between inflation and minimum wage is sketchy. There could be a direct correlation but it is not the main cause of inflation. Also inflation in this country could be caused by other factors no less of which is corruption.

And then there is this article on the subject of economics; a holistic view of how the field can help humanity -- E.F. Schumacher's Buddhist Economics.

More of Schumacher's view of the modern economic system:

‘In what way does it stunt personality” Whatever Mr. Tawney may have had in mind, I should say: mainly by making most forms of work — manual and white-collared — utterly uninteresting and meaningless. Mechanical, artificial, divorced from Nature, utilising only the smallest part of man’s potential capabilities, it sentences the great majority of workers to spending their working lives in a way which contains no worthy challenge, no stimulus to self-perfection, chance of development, no element of Beauty, Truth or Goodness. “Every man,” it has been said, “should be a special kind of artist.” How many men can be artists of any kind in their daily work? The basic aim of modern industrialism is not to make work satisfying but to raise productivity; its proudest achievement is labour saving whereby labour is stamped with the mark of undesirability. But what is undesirable cannot confer dignity; so the working life of a labourer is a life without dignity. The result, not surprisingly, is a spirit of sullen irresponsibility which refuses to be mollified by higher wage awards but is often only stimulated by them. The virtue of being able to hunker down to such a working life, to do your best and scrimp and save to better yourself is real, but it certainly should not be what a decent social and economic system is built around.’

The labour market here is highly distorted. There is a large number of foreign workers we are all aware. According to official government statistic, "the number of foreign in 2007 were more than 2 million workers, a 9.4 per cent increase compared to 2006 (1.87 million) and 53.0 per cent compared to 2003 (1.34 million)". The same report mentioned our workforce in that year is 10.89 million. This mean foreign workers constitute an18% of our labour force.

Don't forget this is just official statistic. The true figure could be much higher. Most of them are taking up the lower level jobs that could be offered to locals instead - those school drop-out, single mother, the blue-collar laid-off family man, or the retired woman who seriously needs a job. Is there another way to guarantee that these marginalized people can get a fair wage for their contribution to the economy, for they do contribute to the economy?

Let me digress a little, the other day my parents told me this: they went to KL town centre for some personal matters. What they see was a place filled with foreigners of all nationalities- Indonesians, Bangladeshis, Vietnamese, one gets the idea. Once familiar places had became dirty and smelly. It was dirty and smelly. It actually looked like they were in another place altogether! Yes, what happened to home.

Another point Prof.Adler made is pertinent, "but my concern is really with the field of economics. The field of economics has been taken over by the rich. Every theory that made sense, and was also empirically true, and also sided with workers and the poor was thrown out for absolutely no reason whatsoever and replaced by theories that have no validity to them. Particularly the theory of wages. The theory that says that people get the value of what they produce is so patently wrong... in the end, you buy into this idea that we can have a definition of economic efficiency without caring about what happens to people."

But in that same session, the question that most concern us here is asked by the interviewer:

"...Redistribution is always discussed in terms of taking from the rich, presumably the productive class, and giving to the poor, often characterized, subtly perhaps, as the undeserving or unproductive class... But is it not possible that what we’re really doing is redistributing upwards? That the government, by its rules, is causing people at the bottom to have less and people at the top to have more, than they would in an economy with a utilitarian approach that Smith and Bentham wrote about?"

Many of us would have known the answer to that question very well.

So, is a minimum wage policy a solution to the problem of labour in this country? There is no clear and definite answer to that. In the end, does the end justifies the means. The end is of course a fair and equitable amount of compensation to the workers. The means could be many- labour unions or paying high wages through increased productivity.

Whatever the means, the point is- in the absence of a policy to address the sliding living standards in this country, is a minimum wage policy an answer to the problem or is it just a 'simple-minded' solution that satisfies our moral conscience? I would tend to stand with the former.