Thursday, 20 April 2017

Minimum Wages

The policy of minimum wages has been implemented in many countries to reduce poverty and tackle the issues of extreme low pay. Over 100 countries worldwide, among 28, national minimum wage (NMW) have been put into effect in 22 European Union member states for their workers. Recently, New German Minimum Wage has been set at € 8.50.

In July 2016, a committee elected by the National Wages Consultative Council (NWCC) has implemented in Malaysia. 4 years prior to this much needed move for Malaysians, the first and previous Minimum Wages Order was gazetted in July 2012, although under legislation, it is to be reviewed biannually.

Meanwhile, In the history of the United Kingdom, NMW was first introduced in April 1999, setting the NMW at £3.60 per hour for adult workers to reduce poverty and to enable poorer, low-skilled workers to have access to basic life necessities. Furthermore, many policies and programs including job search events have also been implemented to help remove the burden of poverty from these people. The result of this successful implementation of NMW was brought about with the effort of the Low Pay Commission {LPC), an independent body that advises government on the minimum wage. It comprises of 9 commissioners of different backgrounds and experiences to allow open discussions on the recommended wage level with different perspective. This produces a result best for not only the workers, but also the wage makers like firms and companies to create a balanced impact on the economy.

In 1997 after LPC was set up, many economists, policy makers and politicians worry about how helpful NMW would be on solving the current issues of poverty and unemployment. They are worried that implementing minimum wages would lead to job loss and wage inflation. The Economist quoted, “coming up with a minimum wage that will not seriously harm the economy, and destroy jobs, will require the wisdom of Solomon – or extraordinary luck” in 1997.
The implementation of the NMW in 1999 was generally regarded as a nationwide success. Before NMW, about 9% of the workers make lower than £3.60 per hour. Since its implementation, in 2013, the trend is seen as such that the NMW is £6.31 per hour and less than 1% of the population of workers make below this number.

Despite ongoing effort to eradicate low pay, in 2012, about 21% of the workers are paid below the 2/3 of the median pay, which means that they are underpaid.

Compared internationally, The United Kingdom performs poorly on NMW. In 2010 despite NMW, there are still 22% of people who make below 2/3 of median pay per hour. The countries with similar or higher percentages are Germany, and Eastern European countries like Macedonia, which generally have lower income as the economy is slow due to its post-war recovery. The median of the amount of people underpaid in the European countries is about 18%.

When looking at NMW and the possibility of NMW causing unemployment, it is important to consider it from the view of economics theories and public interest.

Being underpaid means having the wage lower than 60% or 2/3 of media pay in comparison with the population, setting, nation or environment. The target of £9.00 per hour is what NMW aims to pay the workers by 2020. After meticulous calculation, this amount is chosen as it is 60% of the median of the wage the British gets. At first glance, this is a figure which the public would be happy with, as poorer, low-skilled workers can now afford to feed their families and meet their basic necessity. Meanwhile, it has raised concerns among the policy makers and economists as the implications and consequences of NMW to the British economy are still unknown and unpredictable.

Possible risks and consequences of the implementation of NMW to £9.00 per hour have been identified. Firstly, when NMW is implemented, a party or another may take the hit. It could be the government, the employers, the employees, the consumers or all together sharing the burden of NMW. Government may feel that the firms and wagemakers are paying more to their workers, and to help this companies run smoothly, taxes may be reduced. In cases where government do not show any actions, some employers may be happy to pay the NMW while accepting the reduction in profit. When unsustainable, the employers may either let go of some full-time workers to cut cost, or increase the productivity and work hours among workers to meet the level of profit which they use to make. These firms may also raise the prices of their products which affect the consumers. Another way the employers can cope is to invest in technology that replace low-skilled workers. For example, the use of the dishwashers potentially leads to job loss.

The policy makers been so divided over the topic of NMW, generally categorized into 2 groups. The first group thinks that NMW destroys jobs, causing unemployment and further increasing the rate of poverty in the society. They argue that although NMW is intended to help low-waged, low-skilled workers, NMW may be counter-productive as these may well be the first workers that a company would let go of. On another hand, many regard implementing NMW a great idea because this would attract more workers to want to work which in turn increases the purchasing power of the people, stimulating the market. We also face another big question: how much to raise? This should be explained with some economic theories.

In a supply-demand curve, a perfectly competitive model, the equilibrium occurs when an employee is happy with his wage and an employer is happy to pay him this amount of wage for his skill. if the workers are paid lower than the wage equilibrium, NMW up to the equilibrium not only raise wages, but also employment rate as more people are willing to work for a better wage now. However, if the NMW is set to be higher than the equilibrium, there may be a disparity between the number of people willing to work and the number of workers the company wants to hire. Now, it simply means that people who want to work, cannot get a job, leading to unemployment.

However, the market is not always perfectly competitive. This is because sometimes, there could be only a single purchaser of workforce in the market. When this occurs, we require the Monopsony model, a different diagram to explain this.

It is evident that they have equilibriums at different wages. MRPL stands for marginal revenue product of labour or simply, demand. Marginal cost is the cost a company spends on hiring one more worker. It costs more to not only hire more workers, but it also costs more to keep the existing workers. The employment rate with monopsony model is lower than the rate we see with the competitive model. This limits the options of the workers as this is the only company they could work for.

Although the company spends more money on hiring more workers in (marginal cost), it will pay the worker how much it thinks the worker’s skill is worth. This means the profit the company generates is the difference between the marginal cost and wage it pays to its workers. When NMW is set between these 2 points, it could increase employment rate as it is still within the company’s ability to pay the workers. However, when NMW is set higher than the marginal cost, the company may hire fewer workers to be able to maintain the profit level.

As long as we keep close to the equilibrium, NMW will bring positive effect to employment rates and the economy. Whether a competitive model or a monopsony model, both show that once NMW exceeds the equilibrium, unemployment occurs. Therefore, it is evident that the identification of this equilibrium is mandatory. However, we have not been successful in determining this point.
Many studies have been organised since the 1970s on the effect of NMW on the economy. They typically study young adults from the age of 16-24 years old, most of whom with low skills. After a meta-analysis, it is found that implementing NMW leads to a slight negative effect on the economy and workers.

Card and Krueger 1994, a research done to compare fast food shops in New Jersey, offering $5.05 hourly and Pennsylvania, $4.25 have shown that increasing NMW is beneficial to employment rate. Meanwhile, many other studies have shown an ambiguous effect. As £9.00 per hour is 60% of the median pay in the UK, evidences must be studied carefully to decide whether this will be beneficial to the economy as a whole.

Therefore, the policy makers and economists must be careful in deciding whether the implementation of NMW is beneficial or harmful, and if beneficial, how much the raise should be. More analysis should be carried out in different political and financial settings, to discover and examine all factors that may alleviate or exacerbate the impact of NMW on the economy. Most importantly, we should also consider the implementation of NMW not only about the revenues a company may get, but also decipher social factors like welfare, justice, equality while maintaining an ethical approach to this matter.

In 2050, I foresee a beautiful Malaysia, with our fellow Malaysians living comfortably in a setting in which poverty is eradicated.

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