Should we abolish the minimum wage?

A minimum wage, in general, is a law that sets the lowest possible amount that employers can pay their employees. Industrialised countries around the world have different stances on whether a minimum wage should be implemented. Many have a minimum wage, with the likes of the United States of America, the United Kingdom and China having a minimum wage. On the other hand, developed countries like Singapore, Switzerland and Denmark do not have a minimum wage. This paper argues that a minimum wage is necessary for industrialised countries but should only be applied to certain sectors. Moreover, this should be accompanied by training for low-skilled and low-wage workers.

Minimum wages are mainly targeted at helping low-skilled workers as they are also those who disproportionately receive much lower incomes. This is because low-skilled workers are plentiful as they have fewer years of education and training as compared to higher-skilled workers. This means that the supply for low-skilled labour increases faster as compared to demand. Due to market forces, the equilibrium wage rate is depressed. Moreover, their lack of education and training causes them to be less productive. Therefore, the marginal revenue that each additional low-skilled worker brings is lesser than that of a highly skilled worker. In certain countries like Singapore, low-wage workers of Singaporean nationality may receive even lower wages due to the augmentation of the workforce by the large influx of foreign workers coming from India, Bangladesh, and other less-developed countries.

The reasons for why a minimum wage should be implemented will be discussed first. Firstly, implementing a minimum wage allows for greater equity. Equity is concerned with the distribution of income where people are treated justly and fairly. This is a major concern for all societies because inequalities could lead to social unrest. The higher wage cost is likely to be taken from the firm’s profits. By re-allocating money from the firms to the low-wage workers, equity is improved. In addition, it also improves the overall standard of living for minimum wage workers by providing them with a more appropriate income level to cope with the high cost of living in industrialised economies. By implementing a minimum wage, this will elevate many people out of poverty as they would be earning more than the poverty line. As their income rises, so will their ability to consume more goods and services and hence higher living standards are achieved.

Secondly, in many sectors, wage bargaining power between employers and workers is unbalanced. In a monopsonistic labour market, employers have the power to decide wages and hence wages are likely to be set artificially lower than would be in a competitive market. Therefore, the implementation of a minimum wage may in fact lead to more employment, as the legislation would push the wage up to the point nearer to the market equilibrium wage rate. But even in markets with many employers, employer power may exist due to market failure. For example, workers suffer from asymmetric information, where they may have limited information about other job opportunities. Therefore, they would not know if they are being fairly recompensed. Furthermore, the marginal productivity theory says that a worker's wage should be set at a level that matches the additional revenue that can be earned from hiring that worker. But in labour markets with employer power, wages may not reflect workers' productivity. The imbalance in bargaining power between workers and employers means that there is a role for the government to play by having the minimum wage laws.

Thirdly, implementing a minimum wage may help stimulate the economy. This is because consumer expenditure will increase, and the government can use their budget on economic growth. As the minimum wage is targeted at the lower-income workers, whose marginal propensity to consume is higher, this means that for every $1 of income that the lower-income worker receives, the likelihood of him spending it is higher than that of higher-income worker. This is because the lower-income workers have many needs that are unfulfilled. Greater consumer spending will allow the economy to grow more due to the multiplier effect. Due to the government having to spend less on their transfer payments, it will allow the government to reallocate its budget to other areas that can generate further economic growth through measures such as building infrastructure.

Fourthly, implementing a minimum wage may result in an improvement in productivity. Studies have found that work ethic and employee morale increase when they believe that they are being paid a fair wage. Higher wages are also linked to better mental and physical health, which will also reduce the number of sick leaves that workers would have to utilise and increase their overall productivity. With greater productivity, firms would be able to produce more output, which will allow them to increase their profits, which is the aim of every rational producer.

However, the minimum wage should be abolished because it can potentially increase unemployment. Unemployment refers to a person who is both able and willing to work and yet is unable to find meaningful employment. By implementing a minimum wage, the total expenses of the firm will increase. Firms will therefore be incentivised to choose the relatively cheaper factor input in order to maintain its profit. This may cause them to be more likely to substitute away from low-skilled workers. This will especially hurt the lower-skilled workers because the price elasticity of demand (PED) for low-skill workers is greater. PED is the measure of the degree of responsiveness of quantity demanded of workers to a change in wage rate. One of the factors that affects PED is the availability of substitutes. In the case of low-skilled workers, they can be easily substituted by the extensive use of automation. Many of the jobs that low-skilled workers take up tend to be menial and repetitive in nature. Should a minimum wage be imposed above the market equilibrium price, this would be a push factor that would encourage firms to replace their low-skilled workers with automation. Furthermore, automation tends to be more efficient than low-skilled workers, which will allow the unit cost of production to be much lower. Whether firms can easily replace workers or not depends on the type of industry it is operating in, the firms' ability to pass on the higher cost to consumers and whether the firms face competition from foreign firms. For example, if a minimum wage was imposed, manufacturing firms will tend to turn to automation to enable it to compete effectively in the international market. Therefore, by implementing a minimum wage, it can cause certain firms to retrench low-skilled workers.

Furthermore, minimum wage can lead to inflation where the minimum wage needs to be constantly adjusted in tandem with inflation. In industries where jobs are hard to automate, such as fast-food restaurants, any rise in cost due to the minimum wage may be passed on to consumers in terms of higher prices. If such price increase is perceived to be permanent, then the minimum wage will need to be adjusted upward. If the rise in wages is not compensated with a rise in productivity of workers, this will result in further cost-push inflation, which is not desirable for the economy.

Lastly, implementing a minimum wage has other hidden costs. As firms and workers are not able to maximise their welfare, they may find ways around the restrictions. For example, the minimum wage may incentivise some workers to offer to work at wages below the legal minimum in order to stay employed. Thus, some people will be employed illegally, not only receiving a lower wage rate than before but also defrauding the government of income tax as they would not be able to declare their wages. Alternatively, firms may try to reduce the benefits that come with the job in order to save on labour costs. Not only does this go against the point of implementing a minimum wage, but resources are also inefficiently used as they would have to be devoted to coming up with ways around regulations and ensuring that they do not get caught.

In view of the above discussion, this essay proposes having a sector specific minimum wage plus a wage progression path that incentivises workers to go for training to raise their productivity. This is similar to the Progressive Wage Model used in Singapore. Minimum wage is a short run policy to ensure that low-wage workers are not left behind and they can still earn a liveable wage. This is especially important in the case of a monopsonistic labor market. However, it should also allow for the customisation to the needs of that specific sector. This is important because different sectors have different degrees of substitutability between capital and labour. For example, the cleaning sector has higher low-skill automation than plumbing, although both are relatively low-paying jobs. Hence the former should have a lower minimum wage. However, the work of plumbing has many intricacies that are extremely hard to replace with the current state of technology and hence plumbers require a higher level of minimum wage. This is very important as even amongst the low-wage jobs, there are still certain jobs that require greater skills. Hence, they should be recompensed to a greater extent than their fellow counterparts in other low-wage industries.

In the long run, minimum wage is not enough as it does not address the root cause of the low wages. Instead, these workers must be incentivised to go for training so as to raise their productivity and hence wages. This can be done by setting out a clear career pathway for those sectors and allow for the wages of those in the industry to increase as they go for training. Although employers would have to recompense their workers to a greater extent due to this model, they can expect that their workers would also be able to increase their output to offset their increase in labour costs. This would mitigate the concerns of unemployment increasing due to the implementation of a minimum wage.

In conclusion, minimum wage should not be abolished as it helps to correct the imbalances in workers-employer relationship and improves the livelihood of the low wage workers. However, it must be accompanied by a system of incentives to raise workers’ productivity so that this in turn results in higher payoff for all stakeholders as higher investment and higher paying jobs result in economic growth and improved standard of living for all.

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