The age-old argument surrounding minimum wages has long divided the crowds. While the political left argues that raising it would improve quality of life across the spectrum vastly, the opposing argument from the right – that it can be damaging to employment figures – is equally as convincing. Of course it’s a notion that always gets more or less full support from the public – few would argue against workers being paid a higher rate.
But the bottom line is that there’s so much more to it than each minimum wage worker getting a bigger pay slip one month and therefore having a bigger disposable income to inject into the economy, and a better life as a result of that. Many view raising the minimum wage as a tactic often employed by politicians in the run-up to elections in an attempt to win over voters, claiming that it’s an artificial method of raising the price of labour that is often impossible to sustain, as it cuts demand for workers and increases unemployment as a consequence.
It’s a complex debate, and the impact on employment is notoriously difficult to identify, fundamentally because there are so many varying factors that affect a firm’s ability or desire to employ staff, many of which are numerically immeasurable. When firms are forced to pay workers more, it obviously increases their outgoings and means that cost-cutting measures must be employed elsewhere to somehow make the money back.
Lifting the pay floor can often end up having the most negative impact on those it’s intended to help
Balancing the figures
Often that will be seen in a price rise across products or services, but the majority of the time, it will result in job cuts – and the part-time, entry-level and less-skilled workers are almost always the first to go. This is why when the pay floor is lifted and the squeeze is felt in a firm’s ability to hire, it tends to impact younger workers the most.
High youth unemployment is troubling for a variety of reasons. Younger, less skilled members of the labour force will eventually become the most skilled members, and if the opportunity to develop those skills from early on is not available to them, the quality of labour in the future becomes a worrying prospect. Because so many of those less skilled roles are held by younger people, any economic boost it may provide will often be felt only on a somewhat limited scale. In terms of price rises, getting paid slightly more per hour hardly makes a difference if the general cost of living goes up.
Essentially, lifting the pay floor can often end up having the most negative impact on those it’s intended to help. By increasing the efficiency and quality of performance expected from them and boosting competitiveness within the labour market, it raises the hurdle any worker has to jump just to earn the minimum rate. So considering 60 percent of people living on the breadline in the US aren’t in work at all, all it would do is make finding a job harder for them.
There are endless arguments for and against, but much of the research on the subject comes from advanced economies where the working classes make up a much smaller proportion of the overall population. However, new research from the IMF, which draws on evidence from China – the largest emerging market in the world accounting for 25 percent of the global labour force – could prove a more relevant representation.
The IMF found that on average across all firms assessed, a small decline in employment was detected: a 10 percent increase in the minimum wage rate led to a decrease in employment by just over one percent. For Beijing, the results could be a cause for concern: consistent minimum wage hikes have formed a central characteristic of its government, in the attempt to reduce the income gap and increase domestic demand as it tries to move away from its export industries. Plus, as Chinese demand for labour is so high, provinces are competing with each other to show they’re the most worker-friendly and prevent employees from migrating to more generous regions.
If the minimum wage continues to increase at the rate of recent years, it could eventually have a wider impact on China’s GDP. Some manufacturing firms have already begun moving operations further inland to less developed areas of China where labour is cheaper, and this could even see companies move overseas to low-wage locations in Southeast Asia – Cambodia, Vietnam and Indonesia are popular locations for textiles firms in particular.
Pre-emptive relocation
In more advanced economies, the research and results vary. A report by the Economic Policy Institute in 2013 claimed that raising the federal minimum wage in the US from $7.25 to $10.10 would create an additional 85,000 jobs, and as recently as September 2014, Britain’s biggest trade union Unite urged the government to lift the pay floor by £1.50 an hour, arguing that it would boost the economy and lift millions out of poverty.
Yet when the pay floor was actually lifted in the US in July 2009 by 10.6 percent, just under 600,000 jobs for teenagers were axed within six months. And if the squeeze isn’t felt in actual employment figures or price rises, that’s not to say it’s not there. Often companies find a way to bypass slashing jobs completely by cutting back workers’ hours, so while actual employment figures do not suffer, the average worker’s pay would either remain the same or even end up decreasing.
Even if employment levels do not suffer, insisting that companies pay minimum wage workers a higher rate can have further negative knock-on effects. If lower paid workers suddenly get a 10 percent pay rise it could encourage internal problems among staff, with higher paid employees demanding an increase at the same rate, for example. “Raising the minimum wage would be detrimental to employment. Forcing firms to pay a higher hourly wage would lead to fewer job opportunities and fewer hours, as companies would find themselves less able to take on extra workers, hitting the young and unskilled the hardest”, said Camilla Goodwin, communications officer at the Institute of Economic Affairs, a UK-based free market think tank.
A nationally enforced pay floor or ceiling in general is a difficult concept to manage and enforce. Living wages can vary dramatically from cities to more rural areas: London’s is £9.15 per hour at present, while for the rest of the UK, its £7.85. To counter this, Goodwin suggests regionalising the rate: “Regionalising the minimum wage would prove far more effective at helping those on low incomes without having a damaging effect on job creation, taking into account local economic conditions and the employer’s ability to pay.”
While the move to raise the minimum wage does more often than not come from a good place, it’s a fundamentally damaging policy that tends to pinch the people it’s intended to help the most. A blanket rule is evidently not appropriate as the effect can vary drastically between countries and even regions.
However, the situation in China is simply proof of how political tactics can be cleverly disguised as left-wing economic reforms.
