August 5, 2021

The Editor Speaks: Pros and cons of a Minimum Wage Pt 2

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Colin Wilson2webThe Minimum Wage Advisory Committee (MWAC) will be submitting to Government by the end of this month their report of recommendations for introducing a minimum wage to the Cayman Islands.

The meetings around all the districts in the Cayman Islands have not been well attended although Committee Chairman Lemuel Hurlston has said he has enough data collected from the public to have a good sense of what their feelings and concerns are.

Yesterday and today I have highlighted articles on this subject.

Today’s article is by Robert Nielson who points out the pros of mandating a minimum wage. Yesterday was the cons of mandating a minimum wage.

The advantage of the minimum wage

By Robert Nielson

There is a lot of debate over the minimum wage. An internet search of the topic will return with almost unanimous condemnation of it. It is blamed for unreasonably pushing wages too high and causing unemployment. It is decried as a major cause of economic problems rather than the solution. However, these arguments are based upon over simplified ideas and graphs. Now, most of them look nice and are easy to understand, but they should be judged on how well they describe the real world. The simple fact is they don’t really.

The main argument is that if a workers marginal productivity is 5 euro, they cannot be paid 6 euro. Now this presumes that the boss knows what the workers marginal productivity is. If they worked individually in a factory, this is possible, but for most other workers it isn’t. For example if you go to the student bar and order a pint, what is the bartender’s productivity? Would measure the number of pints he pours? But you only need one bartender to do that, the others just reduce the time you’re waiting. What about the bouncers? Or the guy who cleans the toilets? If you stop and think of a job, the fact is it’s probably pretty hard to measure its marginal productivity. And low wage jobs are some the hardest to measure. So a workers wage is not based on an immovable and perfect law of economics, it really is just a guess.

Another assumption is that workers are never under paid. The logic is that if a worker was under paid, a rival firm would offer a higher wage to them. This might be true for say, a manager, but not for someone doing a menial job. Can anyone honestly tell me that a rival company will tell someone working in McDonalds, I like the way you mop the floor or I like the way you work the deep fat fryer, come work for me. It simply doesn’t happen. There are no head-hunters scouting for low wage workers.

So it’s quite possible, in fact pretty likely, that workers can get under paid. But it could be argued that if wages are too low, people just won’t take a job. But if you have the rent to pay, you’re going to get a job no matter what the pay is. But some would say why don’t they ask the boss for a rise or form a union. But take a look at who low wage workers are. Teenagers, immigrants and women. If I asked you to give me a list of the people least likely to confront their boss, least likely cause any trouble that would be it. This is why the government must force the firms to comply. The government has to stand up for those who can’t do it themselves. Another reason is that even if the boss was kind enough to give them a raise, if no other company did it, he would be uncompetitive and go out of business. That is why the government must force all businesses to comply.

In fact the strongest argument in against the traditional view of the minimum wage is that it doesn’t hold true in real life. There is the famous Krueger and Card study that concluded that “We find no indication that the rise in the minimum wage reduced Employment.”Most recent studies find that it has only a slight effect on employment. It either slightly increases or slightly decreases employment. Either way it does not result in the mass unemployment predicted in the traditional argument. Look at this review of recent studies. It concludes that there probably are unemployment effects, but it is extremely slight. We can increase the minimum wage and boost the income of the lowest wage workers with only slight effects on employment. In order words the benefits far outweigh the negatives. A theory must stand on how it reflects real life. If it is unrealistic it must be ditched. The traditional theory of the minimum wage is unrealistic.

The minimum wage has many benefits. It reduces inequality by redistributing income from business towards low wage workers. It provides a boost to the economy as low wage workers spend almost all of the money rather than saving it as richer people do. It also reduces poverty and directly helps the poorest workers. By increasing workers wages it improves their morale and therefore productivity as well as reducing turnover (a major expense in low wage industries like food & drink). Wages are not the be all and end all. Often they are not even the main expense (as in capital intensive industries) or most important (as in inelastic industries).

I would like to finish on one final note. America has this thing called food stamps, which basically means that if you cannot afford food, the government will give you money to buy it. Many of the people on food stamps have a job. It is a terrible injustice. There should be a simple rule in life that if you are willing to get a job and work hard, you should be able to feed yourself. That is why I believe that the government should guarantee everyone who has a job gets a living wage and is not mired in poverty.


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