The Minimum Wage Question

I am cognizant of the fact that this topic may devolve into a whirlwind of liberal sentiments against conservative sentiments, and for that reason I am going to try to remain as neutral and analytical as possible. This article attempts to suggest ways that our current national minimum wage framework may be improved.

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How It Works Economically?

The 'X-Axis' represents the quantity of labour, basically the workforce. The further right you move on the 'X-Axis', the larger the quantity of the workforce. The 'Y-Axis' represents the price of labour, basically how much workers get paid. The higher up you move along the 'Y-Axis', the higher the pay. The 'Blue Line' represents the demand for labour and the 'Red Line' represents the supply of labour.

Without getting too boggled with the economic intricacies of the above diagram, where demand and supply interact (labelled above as the 'Equ. Wage') is how much workers would get paid if the free market was allowed to determine wages. However, the minimum wage line (black line cutting through the demand and supply curves) artificially sets the minimum wage above the market determined rate, which results in a surplus of labour (resulting in unemployment due to excess workers but limited jobs). This is why the government aim of full employment can never be achieved if said government adopts a national minimum wage policy.

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What Are Some Of The Problems?

1) It doesn't account for variations in company profitability/size

Take for example the manufacturing industry. The imposition of a national minimum wage would reduce competition in the manufacturing industry, leading to complacency and a lack of growth in that industry. This is because large manufacturers like Apple would simply shift their production to a country that has cheaper labour costs (Apple actually does this!), whilst smaller manufacturers that don't have the resources to shift their production to another country will have to contend with higher labour costs, which inhibits their growth, raises the barrier to entry for new manufacturing start ups, and prevents effective competition towards companies like Apple (P.S. If it's not already clear, competition leads to efficiency, which leads to growth). Furthermore, Apple shifting production overseas removes jobs from the domestic economy, which exacerbates unemployment. A free market determined wage rate (equilibrium wage rate) wouldn't solve this problem completely, but it limits it to an extent, because labour markets are more flexible.

2) Regional disparities in the cost of living

The cost of living doesn't just vary from country to country but also varies from region to region within a country. For instance it would cost a person a significant amount more to live in KL than it would to live in Sabah, yet if we employ a national minimum wage (NMW) a worker in KL on NMW would earn the same as a worker in Sabah on NMW. Is this fair? Clearly the worker in Sabah would be able to enjoy a better lifestyle than the worker in KL? Should the NMW take this into account? If so, then how? And how often would it change to respond to changes in the regional cost of living?

3) It doesn't account for variations in industrial profitability/size

Previously I mentioned the problems that would occur with respect to companies within the same industry, but what about companies in different industries? Should a large bank pay its tellers the same wage as a fishing company pays its fisherman? The banking industry is more profitable, larger, employs more people, and has higher revenue than the fishing industry (which may or may not have had more regulatory requirements than banking in the US prior to 2008), yet they are both required to pay the same NMW to their lowest tier employees? Is this fair? Clearly the minimum wage paid to fisherman represent a greater burden on the costs of the fishing company than the minimum wage paid to tellers do to a bank. In effect the industry with lower profits suffers more from NMW than industries with higher profits.

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Solutions

When NMW was popularized in the 1920's by the League of Nations, they originally intended for it to apply to industries and sectors of the economy where "collective bargaining institutions have yet to be sufficiently formed." This gives way to our first solution. Instead of imposing rigid restrictions on a flexible market the government could strengthen the power of trade unions and fund the creation of independent unions for those jobs/industries where trade unions have yet to develop. Legislation that improves the power dynamic between employers and employees, should result in fairer labour markets, although the power distribution should be monitored with caution. Workers in companies with varying profitability rates could agree on a wage rate with their employer that is appropriate for that company. At the same time, workers living in different parts of the country could exercise their collective bargaining (refer to forum) power to obtain wages that accurately reflect their cost of living.

The second solution would be to develop a minimum wage that takes into account the factors mentioned in the preceding section. This would create a certain degree of justness and flexibility in labour markets, but a cost-benefit analysis would have to be performed to determine whether such a measure is worth the government undertaking.

Lastly, we could merely leave the labour market alone. This allows for maximum competitive pressure, which would increase the efficiency of businesses, thereby keeping prices down for consumers and allowing for economic growth. In an ideal world, it may even allow for full employment.