The case for rethinking the minimum wage.
Last month, Hong Kong finally did it. A long-running symbol of laissez-faire, the Asian tiger will implement its first minimum wage on May 1st this year. A cursory glance at various countries’ wage policies reveals that Hong Kong is a relative latecomer to the minimum wage scene. To date, but a handful of countries (United Arab Emirates and Singapore, among others) have no minimum wage laws or regulations. Does this mark an inexorable trend, and more importantly, is this truly the right way to go?
The reasons for and against a minimum wage are well known. As economist Richard Posner notes, increasing the price of an input (the hourly wage, in this case) raises the product’s price and thus lowers demand for it. Such misallocation is similar to that of monopoly pricing. Moreover, consumers of goods and services produced by low-wage workers usually tend to have below-average incomes as well (consider whether the poor or rich eat at fast-food joints more often).
And so the perennial (and still hotly debated) question of whether a minimum wage contributes to unemployment among low-wage workers remains. As Posner argues, minimum wages can often cause reductions in the employment of workers who are paid less than the imposed minimum wage. Hence, the costs of minimum wages fall not only on marginal workers, but lower-income groups in general. Contrary to popular belief that they are more equitable, economists like Posner thus argue that minimum wages lead to both inefficient and inegalitarian outcomes.
Nevertheless, proponents of a minimum wage insist that it still increases the standard of living for the poorest in society, and, unlike welfare payments, requires them to work for a living. Empirical studies on the effects of minimum wages are mixed. A study in 1992 by economists David Card and Alan Krueger found that negative employment effects of minimum wage laws are minimal to non-existent, yet their findings have since been routinely questioned.
In light of all this, there exists a way in which governments can ensure lower-wage workers earn a sustainable wage while minimizing the negative effects of minimum wage laws: workfare. Having the state pay extra wages or welfare payments to low-wage workers is hardly a new idea, yet this targeted approach towards poverty seems to have had trouble gaining traction.
In this regard, the example of Singapore, one of the four Asian Tigers besides Hong Kong, is instructive. There, the government, rather than businesses, supplements the wages of low-income workers while also encouraging them to upgrade their skills. As Singaporean blogger Alex Au notes, the cost and implementation of workfare is borne not by businesses, but by the state, resulting in less market distortion. Granted, this system is not without its problems: some have argued that workfare’s supplement is still too small to allow low-income workers to cope with increased costs of living.
Still, more countries around the world should consider substituting minimum wage laws for a program which supplements the income of those who truly need it (the poor, not college kids from wealthy families looking for extra disposable income). A more targeted system would undoubtedly require a better and more efficient state apparatus, rather than passing the buck to businesses to comply with minimum wage regulations. Still, with all the hype about Gov 2.0 revolutionizing the way governments operate, you’d expect that better-designed programs could be designed to help the poor. Will Hong Kong eventually opt for something other than a minimum wage to help the poor though? Don’t hold your breath.
Photo credit: The Epoch Times