Monday, 29 October 2012

Social justice and growth: The role of the minimum wage

Pierre Laliberté

This issue of the International Journal of Labour Research (Volume 4, Issue 1 (2012)) is wholly dedicated to the question of the minimum wage, a matter that has gained in importance and profile in recent years. No doubt, the main reasons behind this rise in prominence relate to the stagnation of wages in several parts of the world, a generalized increase in earnings inequality as well as the rise in social unrest across the globe.

In many countries in the economic North where minimum wages have generally been somewhat secondary to collective bargaining for unions, the drop in union coverage and the incapacity of maintaining full employment have translated in the creation of growing pockets of low-paid workers (whether paid at minimum or quasi minimum wages), particularly in non-tradable private services.

In the South, the maintenance of large informal sectors and the concentration of the export sector in often low-paid labour-intensive supply chains where a brutal global competition exists have acted as an effective brake on the improvement in wage levels and have kept the question of the minimum wage at centre stage.

To make things worse, many governments over that same period, bowing to the orthodox notion that improving minimum wage might be an obstacle to fostering growth and employment also neglected this policy lever and often failed to maintain, let alone improve, its value, thus expanding the growing pool of the working poor.

While minimum wage setting is clearly second best to bona fide collective bargaining for all workers, its importance in the current economic context cannot be understated.

It is so in many OECD countries where the current pressures on wages, if successful, might well lay the foundations for deflation and a long period of stagnation. The pressures of the European Commission and the IMF to reduce minimum wage levels in Ireland and Greece among others are emblematic. To the contrary, in the current economic context, it should be seen as essential to preserve the minimum wage as an “anchor” so as not to fuel further destructive deflation, never mind social distress.

Furthermore, when it comes to inequality, a strong minimum wage can help make a genuine difference in outcomes. On this score, one only has to compare the performance of Germany and France to appreciate the difference. France, with arguably the highest national minimum wage in Europe, stands as one of the few countries that have not experienced an increase in inequality in the past twenty years. Germany meanwhile with no minimum wage has seen an explosion of low wage workers and the growth of inequalities in large part due to the “collapse of the bottom” of its income distribution1.

At the policy level, the issue of the minimum wage remains deeply controversial as it introduces moral considerations as to what constitutes minimal and fair compensation in a given economy and the role of minimum wage in ensuring that people earn enough through their labour to afford to sustain themselves and their families. Yet this entry of “morality” in a discipline that prides that sees itself as scientific and positivistic is always bound to be contentious especially if it goes against the “law of gravity” of neoclassical economics: a rise in price (wages) must necessarily result in a drop in demand.

However, there are sound economic reasons to question that premise.

At the theoretical level, Keynes in the General Theory has famously put forward the notion that wages as such had no tangible impact on the general level of employment, that being determined instead by the level of overall demand. As he put it, “the struggle about money-wages primarily affects the distribution of the aggregate real wage between different labour-groups”2.

The evidence in the real world appears to bear out this notion. For instance, Scandinavian countries, with notoriously low wage dispersion (and high sectoral minimum wages) have typically outperformed countries with different sets of institutions and bargaining arrangements, but with lower minimum wages and greater wage dispersion3.

Of course, relatively high minimum wages and low wage dispersion do have effects on the social outcomes, the economy and employment. But whether those are positive or negative depends on a combination of factors such as changes in relative prices, in the wage structure, demand, profits, productivity, but also social cohesion4. The bottom line is that there is much more room for discretion in these matters than typically admitted by mainstream economists and in some quarters of the business community5.

Quite tellingly the plethora of studies (and meta-studies) that have been conducted on the effect of increases of minimum wages on employment are for the most part inconclusive, in the sense that they do not confirm the predicted negative relationship. As one would reasonably expect, the results depend on the specific context in which the studies were conducted (let alone their methodology)6.

This is why such matters should naturally be the object of social debate and negotiations between social partners.

The erosion of the role of the minimum wage as the guardian of the purchasing power of the lowest-paid workers has been the trigger of numerous campaigns and much resistance throughout the world. It has notably inspired many local grass-roots campaigns in the United States around the notion of “living wages” where labour and community groups have been working side by side for the improvement of workers’ income. In this issue, Stephanie Luce provides a comprehensive and extremely useful assessment of these campaigns and the lessons they hold for the labour movement.

In other countries, changes have come through other avenues. In Brazil notably, trade unions pressured the incoming Lula Government in the early 2000s into a renewed commitment to a minimum wage, which translated into a gradual improvement and recovery of the value of the minimum wage. Not only did vigorous increases in the real value of the minimum wage not provoke economic slowdown, but the redistribution of income that ensued is partially credited for fuelling the dynamism of the Brazilian economy. The article by Barbosa de Melo, Figueiredo, Mineiro and Arbulu Mendonça gives us a historical perspective on the development of the minimum wage in that country as well as its current impact. A useful antidote to orthodox prescriptions.

Bhattacharjee and Roy, for their part, present a path-breaking effort to establish a cross-country floor for wages. This campaign, the Asian Floor Wage, aims to create a common “real” wage floor for workers in the same labour-intensive export industries, more specifically the garment industry. The idea is quite simple and yet revolutionary – that the wage earned by workers in the same industries across the region should earn roughly the same “purchasing power” so as to not undermine each other and, to some extent, take wage out of the competition. If successful, this effort at creating strategic links of solidarity between workers on a living wage would assuredly be a watershed moment for international labour.

Remaining in Asia, the article by Rani and Belser on India highlights the original role played by the National Rural Employment Guarantee Scheme in helping enforce minimum wage in a country where the great majority of the workforce is still found in the informal sector. This scheme, by guaranteeing one hundred days of work per year at the minimum wage for all rural households, is in effect providing “traction” to the minimum wage that it might not have otherwise, creating an upward pressure on earnings, particularly those of women, and improving household income. This is an “employer of last resort” programme that should draw much interest, particularly in countries with a large informal sector.

In his article, Thorsten Schulten presents the current debate on the establishment of a European minimum wage. Noting that the European Commission, through its Euro-Plus Pact, has “officially declared [wages to be] the main adjustment variable for economic imbalances and national competitiveness in Europe” and that it is now engaging in a full offensive to roll back minimum wages as part of the “crisis packages”, Schulten proposes the notion of a European minimum wage as a component of an alternative strategy. As he points out, this notion already has a basis in the European Social Charter of the Council of Europe which calls for a minimum wage of 60 per cent of the national average net wage. It is worth noting that in 2010 only five European States met that threshold…

Last but not least, in keeping with the practical bent of this issue of the IJLR, Belser and Sobeck provide a succinct guide to minimum wage setting methodology. Using the knowledge and experience the ILO has gained surveying and advising social partners across the world, they lay out some of the considerations labour and community representatives should have in mind when they push governments and employers on that all-important issue. In full agreement with the notion that at its best a national minimum wage should be the subject of social dialogue and not seen as a “technical” matter, they nonetheless provide tools that will be useful for those engaged in national discussion on the issue.


Footnotes: with apologies for not linking properly (my HTML knowledge is not up to it in Blogger)
1. See ILO: Global Wage Report 2008–09 (Geneva, 2008).
2. J.M. Keynes: The General Theory of Employment, Interest and Money (London, Macmillan, 1936), p. 13.
3. It is also worth noting that in economies with significant underemployment, lowering the price of labour might actually induce an increase in supply as workers need to work more to survive.
4. For a most cogent explanation of this argument, see H. Herr: “Labour Market in a Keynesian Economic Regime: Theoretical Debate and Empirical Findings”, in Cambridge Journal of Economics, Vol. 33 (2009), pp. 949–965.
5. Robert Lucas, one of the most prominent conservative economists, is exemplary of the hostility to pollute economics with ethical concerns. As he put it: “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution…” Robert E. Lucas: ”The industrial revolution: Past and future,” in The Region (May 2004), Federal Reserve Bank of Minneapolis, pp. 5–20.
6. See for instance R. Dickens, S. Machin and A. Manning: “The effects of minimum wages on employment: Theory and evidence from Britain,” in Journal of Labor Economics, University of Chicago Press, Vol. 17 (1999), No. 1, pp. 1–22; D. Card and A.B. Krueger: Myth and measurement. The new economics of the minimum wage (Princeton, Princeton University Press, 1995).

Full text (PDF 128pp)


11  Living wage policies and campaigns: Lessons from the United
      Stephanie Luce
27  Rescuing the minimum wage as a tool for development in
      Frederico Luiz Barbosa de Melo, Ademir Figueiredo,
      Adhemar S. Mineiro and Sérgio Eduardo Arbulu Mendonça
45   The effectiveness of minimum wages in developing countries:
      The case of India
      Uma Rani and Patrick Belser
67  Asia Floor Wage and global industrial collective bargaining
      Anannya Bhattacharjee and Ashim Roy
85  European minimum wage policy: A concept for wage-led
      growth and fair wages in Europe
      Thorsten Schulten
105 At what level should countries set their minimum wages?
      Patrick Belser and Kristen Sobeck

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