Minimum Wage and its implications
Speaking in his private capacity at an Institute of Policy Studies seminar at the Shangri-la hotel, Member of Parliament Inderjit Singh suggested that a minimum wage might lessen the burden on lower income groups whose wages have been depressed by cheap foreign labour. – The Online Citizen
Minimum wage is often cited as a labour tool to prevent exploitation of inexperienced and low-skill workers.
However, classical labour theory (sometimes common sense too) states that a minimum wage will raise unemployment because employers can afford fewer workers when the minimum wage is higher than the market equilibrium wage (labour demand equals to labour supply). If the minimum wage is lower than the equilibrium wage, then we won’t need the law at all.
Plotting wages against employment, we can see the effects of a minimum wage that is above the equilibrium wage.
Classical effects of minimum wage on unemployment
At a minimum wage higher than equilibrium wage, more people is willing to supply labour to the market (Number Supplied), but less employers are willing to demand for labour (Number employed/demanded), hence creating a supply surplus (unemployment – the difference between number supplied and number employed).
This price floor might work for food commodity such as wheat in the U.S. where the government buys up the excess supply. However for labour, the government won’t be able to create thousands of jobs just to provide employment to the excess supply.
So is having a minimum wage rate going to help the lower-income group?
Linda Gorman, a senior fellow at the Independent Institute, do not think so. She writes,
Although minimum wage laws can set wages, they cannot guarantee jobs. In practice they often price low-skilled workers out of the labour market.
Princeton economist David F. Bradford wrote in a 1996 WSJ article titled minimum wage vs supply and demand,
The minimum wage law can be described as saying to the potential worker: ‘Unless you can find a job paying at least the minimum wage, you may not accept employment.
Gary Fields, Professor of Labour Economics and Economics at Cornell University, criticised that the textbook classical model for minimum wage is too ambiguous and it only measures one sector. He recommended that for a better analysis of the effects of a minimum wage policy, a two-sector model should be used. The first sector will have minimum wage coverage while the second sector does not have any. There is possibly mobility between the two sectors. He cited the second sector includes self-employed and service workers who are typically excluded from minimum wage coverage.
If the minimum wage forces unemployment in the first sector, the unemployed could possibly move to the second-sector for employment opportunities. Therefore, unemployment rate will not be affected. In the single-sector model, unemployment will surely rise as this model does not allow for mobility to a sector that does not have minimum wage coverage. Fields said that a non-covered sector exists almost in all economies, therefore the predictions from the one-sector model cannot be rely on.
Other possible reasons that suggest that minimum wage does not affect employment (or only minimally) are posited by Alan Blinder. He suggested that higher wages may reduce turnover (perhaps due to an effect like efficiency wages) and hence also training costs. So the cost savings can be used to hire more minimum-wage workers.
There is an interesting research by David Card and Alan Krueger whose results are also published in their 1995 book Myth and Measurement: The New Economics of the Minimum Wage. In summary, they argued that the effects of minimum wage laws on unemployment are minimal or non-existent.
It’s obvious that the effects of minimum wage on unemployment and its use as a tool to protect workers are divided among labour economists. There are other variables that could affect the unemployment rate due to the minimum wage laws such as the one suggested by Alan Blinder.
The government will need to seriously do their homework on the effects of minimum wage laws. Their research on the effects needs to be rigourous and not be like the one that resulted in the ridiculous CBD Taxi rule implemented by LTA. Sometimes well intentions need good research to be implemented properly and to good effects.
What are your opinions with regards, to the local context, to implementing a minimum wage cap along side a cap on the inflow of forgien workers?
Mike: My behind-the-envelope opinion is that the following might happen:
- our competitiveness drops as manufacturing labour becomes more expensive
- construction becomes more expensive (assuming the cap is on the foreigner labourers since foreign talents should have a much higher wage)
- some inflationary pressure on housing
- contractionary in the export market as exports become more expensive (if companies pass on the higher labour costs to the product)
Having said that, I’m not really sure what will happen if we do have a minimum wage law tag-team with a tighter immigration policy. I believe we need these foreign labourers to do the grunt work for us. And of course to grow the economy. We used to have a bottle-neck to our economic growth due to labour shortage, hence our government open our doors to foreign labourers so that this bottle-neck will be eased.
Hi Bernie,
Agree with all the points you made, though would have imagined that there would be deflationary pressure on housing instead though, due to reduced demand from immigration restriction?
Actually I should have been clearer, what I was attempting to do was explore the potential benefits of a minimum wage for locals with respect to a targeted minimum wage and immigration/foreign work permit policy.
Specifically in the services industries – for example cleaners, sales assistants etc.
My feel is that the locals have unfair competition (responsibilities such as maintaining a family in a country with a higher cost of living) in some categories of unskilled work.
In my opinion the benefits include
- reduced pressure on housing (which since in SG forms a substantial part of a persons CPI – a reduced cost of living)
- More money circulated with in the local economy – since less money is remitted out of SG.
- An increase in savings and as a result investment.
- ideally under the targeted approach, increased prices stemming from wage increment would only be contained some what to those industries; luxury items whilst the minimum wage would increase the consumption ability of the (low wage) individual.
- no need to increase GST to fund a ‘welfare’ distribution system ;p
Btw, noticed that you’re in the LSE external programme as well. 2nd year, SIM? I’m on the econs programme as well.
Mike
Mike: Thanks for your well-written comment =)
It’s possible that there is deflationary pressure because of reduced demand, but I think the effect is negligible because only residents can purchase HDB flats (foreigners can only rent). Whereas, increase in construction costs will surely increase the selling price, thus causing inflationary pressure on housing.
My feel is that the locals have unfair competition (responsibilities such as maintaining a family in a country with a higher cost of living) in some categories of unskilled work.
I agree with you on locals having unfair competition. Those low-skilled workers do face very tough competition with depressed wage, rising living costs and possibly a family to help out.
- More money circulated with in the local economy – since less money is remitted out of SG.
If the remittance money is converted by the local bank to the currency of the foreign country, then money supply won’t change within the domestic economy. But perhaps you mean that the current money supply will go through more transactions since they are not just stuck in the bank.
- An increase in savings and as a result investment.
There is also the paradox of thrift to consider with increased savings. Especially given the tight lending environment recently. However, that is a good point made.
- no need to increase GST to fund a ‘welfare’ distribution system ;p
I hope the consumption tax will be reduce to stimulate more spending demand instead of raising it to fund ‘welfare’. That’s what reserves are for. Haha.
Yes yes, I’m taking the course in SIM. Year 2 too?
Hi Bernard.
Yup into the 2nd year as well. Used to be a Stansfield student but have since left. On my own at the moment.
1) After reading your reply, on raising construction costs, I realised that we’re approaching this from different angles.
I think it would be useful to consider the income bands affected.
Say a minimum wage is introduced which only includes certain industries; let’s leave construction and skilled industries aside.
Further a minimum wage probably only affects the low to low-middle income band.
Then the minimum wage shouldn’t contribute to increased construction costs, yet with reduced demand in the rental market (and possibly purchases for investment due to diminished ROI), shouldn’t cost of living fall?
I suppose the question is whether this targeted approach would be significant enough to make such an impact. Ha.
2) Regarding the money circulation comment I meant that more money would be spent locally – either via savings or consumption since remittance doesn’t add to consumption domestically?
I suppose you’re right though that the act of remitting is a form of consumption as well, didn’t consider that.
3) Regarding P.o.T, given that we’re discussing minimum wage and hence the lower income groups (who typically consume most of their income), there should be an increase in net consumption.
The question is whether said consumption is enough to make up for decrease in consumption resulting from caps to (low paid) foreigners.
Hope you don’t mind the discussion. It’s an area I found somewhat lacking in school. haha.
Mike
Further a minimum wage probably only affects the low to low-middle income band.
Yes, it is to help low income, not so much for low-middle income
Then the minimum wage shouldn’t contribute to increased construction costs, yet with reduced demand in the rental market (and possibly purchases for investment due to diminished ROI), shouldn’t cost of living fall?
Given your assumptions of targeted minimum wage laws and tighter immigration policy, it is possible that cost of living might fall. Might I also add another assumption that inflation rate is pretty low (like the 0.5-1% we used to have) so that food commodity and transport/communications costs do not escalate to offset any decrease in housing costs.
I suppose the question is whether this targeted approach would be significant enough to make such an impact. Ha.
Haha, exactly. Target too little of the production industries, the law will just be for show. Target too much, we might be looking at some other resulting problems such as higher unemployment.
2) Regarding the money circulation comment I meant that more money would be spent locally – either via savings or consumption since remittance doesn’t add to consumption domestically?
We have the same meaning. What I meant was higher velocity because the money is still in circulation rather than go out of the country.
3) Regarding P.o.T, given that we’re discussing minimum wage and hence the lower income groups (who typically consume most of their income), there should be an increase in net consumption.
You’re right, the general assumption is that lower income group will consume more since essential goods constitute a higher percentage of their income. I agree with that too. As you mention higher savings in your previous comments, so I brought up the POT problem. Yes, I think there should be an increase in consumption if the group that benefited from the minimum wage laws is substantial enough.
The question is whether said consumption is enough to make up for decrease in consumption resulting from caps to (low paid) foreigners.
You’re worried about the drop in GDP? Even though GDP growth is important, minimum wage laws are not enacted to grow or reduce GDP, so I think the correct perspective to look through is whether the laws will help the intended target and not exacerbate their problems (and the country’s as well) through higher unemployment rate.
Hope you don’t mind the discussion. It’s an area I found somewhat lacking in school. haha.
In fact, I welcome your discussion. It’s a very exploring type of discussion as you brought up points that I have not thought about and it provides me with another perspective. Thank you for initiating the discussion and commenting on my blog. From the way you think and write, you sound like you work in a related economic field. Being a bit kaypoh like the Kway Teow Man, can you share why did you leave Stansfield? You could email me if you like.
I am not an economics expert – but coming from the perspective of social welfare, minimum wages actually help to protect low wage workers from exploitation by employers.
For example I used to work in Burger King for $2.50 an hour. While that hourly rate might have been increased by now, I think even $3.50 an hour is considered borderline human rights abuse. I don’t think Burger King or MacDonald’s are not able to afford higher wages given that their food aren’t cheap and cost little to produce. Of course there are also operations costs to consider, but to think of it – a Macdonald’s meal in Singapore costs about S$6.50. Workers get paid $3.50 or so an hour. In Canada, a meal costs about the same in CAD, but workers get paid about CAD$8 to $10 an hour (there is minimum wage law in Canada).
So assuming costs of doing business in Canada and Singapore are similar if not higher, that means without minimum wage law Singapore employers are free to pay low wages as they please, not for the sake of keeping costs low but rather to extend their profits. Of course we can come around to say that perhaps in Canada because of the high wages McDonald’s may not be earning a lot of profits… but then we can also turn around and argue that while it is important for businesses to earn decent profits, they also have the moral obligation to ensure that their employees are adequately compensated and need not take up several jobs to support their families.
This is kind of an incentive problem – as long as the Government don’t set any minimum wage laws, businesses will continue to pay the lowest possible wages – why pay more when there’s no incentive to do so?
I also doubt that manpower costs (wages for low wage earners – not how much the bosses pay themselves) is the most significant cost category in the service industry here, where the typical low wage earners are (e.g. cleaners, fast food workers) – so I don’t think implementing a minimum wage, say $5/hour will hurt the economic viability of fast food outlets.
mrbiao: Thanks for your comments. The main argument for implementing minimum wage is indeed social welfare.
From your argument, it can be suggested that the coverage of minimum wage laws to certain sectors will be important to balancing the prevention of exploitations and the potential increase in unemployment.