Tuesday, August 31, 2010

Minimum wage - not easy to get it right

The minimum wage has lofty goals of helping the poor. Prominent figures whom I deeply respect have voiced their public support on this policy. I am sure these people have the kindest of intentions. However, it is highly questionable whether the effect of the minimum wage is really beneficial to the poor.

If the minimum wage is set too high, it will create unemployment to people who are worth less than the minimum wage. No employer (unless he is your father) will pay a worker more than what he thinks the worker is worth. Anything more will be charity. It is not fair to expect charity from bosses because they set up companies to make money, not give away money. In a capitalistic economy, a minimum wage which is set too high will lead to higher unemployment among the young, the old and the unskilled. The young will be hit because they still have not accumulated enough work experience to be worth more than the minimum wage. The old will be hit because their market value has depreciated below the minimum wage over the years. The unskilled obviously do not have the skills to be worth the minimum wage. They will be condemned to permanent unemployment because they will not be employed in the first place. Not being employed denies them the opportunities to acquire useful skills on the job which can lead to higher salaries. At least exploitation gives the low-wage worker hopes of gaining useful skills which allows him to command a higher salary later. By protecting workers against exploitation with minimum wage, more potential damage is done. It is exploitation that allows low-paid workers to have on-the-job training opportunities that hopefully will raise their worth later on. They can job-hop to higher-paying jobs after getting enough experience, thanks to exploitation. I think if people recall their job history, some probably felt exploited during their younger days with low salary. But it was this exploitation that allowed them to job-hop to higher-paying jobs later on. Surely, temporary exploitation is better than permanent unemployment.

The most seriously hit will be the poor because they are the group with the most number of people whose market value falls below minimum wage. Instead of helping the poor, the minimum wage may end up raising unemployment among the poor. Given that social welfare in Singapore is near non-existent (due to low taxes), the consequences will be terrible for these people.

If the minimum wage is set too low, one might as well not have this rule in the first place. Why scare off investors and businessmen unnecessarily and create new administrative inconvenience? 

Even if the minimum wage is set optimally initially, it will not stay optimal for long. The optimum level will be fluctuating with economic conditions. It is impossible for government officers to adjust the minimum wage optimally with changing economic conditions. If they can be so in tune with the economy, they might as well speculate in the financial markets and make a bundle.

Because it is so hard to set the optimum minimum wage, I think we should leave wages to be set by the invisible hand of the free market than the well-intentioned but clumsy hand of bureaucrats.


  1. i agree to an extent but your opinion seems like "survival of the fittest"

    leaving it to the market forces may leave out some groups of people who are part of our society.

    i think the gov should intervene and help out the poor and needy through other means like 'job placement program' instead of setting a min wage.

  2. I certainly agree with helping out the group of people who worked hard to earn a honest living but are still left out by the free market. The free market, while proven to be the most effective economic system, cannot reward all deserving people fairly. Sometimes, the free market screws up by rewarding undeserving people unfairly at the expense of deserving people. In the financial crisis of 2008, undeserving Wall Street was rewarded at the expense of the more deserving taxpayers.

    The ultra-elitist statement "Get out of my elite, uncaring face" assumes that people who are poor are unfit to survive because they are lazy and demotivated. If they are poor, it must be their fault. (Do be forgiving to the girl who uttered the infamous statement. She was still a student then. Perhaps she has seen enough to change her mind now. My attitude was not too far from hers when I was still a student until I lost my first job despite very working hard and being well-liked by my boss. Ability and hard work is no protection against retrenchment when bad times hit, if you are at the wrong place at the wrong time.)

    The minimum wage springs from good intentions but executing it badly by setting the wrong minimum wage level can lead to higher unemployment among the poor - the very people it seeks to help.

    Unfortunately, I am not smart enough to make effective suggestions for the poor.

  3. I agree that no one is going to pay more than you really worth. Furthermore, in most occasions bosses offer you less than you really worth because they need to make money and want to make as much as possible. That’s why it’s important to understand what a minimum wage really is. At the same time there should be a limit which employees can’t exceed because a wage should allow to cover ta least basic living expenses. There no sense to work if you have no money. And this limit is regulated with a help of minimum wage. But it’s hard to imagine how to stay afloat if your wage is so low, most people with minimum wages get 1 hour payday loans and borrow money to cover their expenses.

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