Minimum Wage Lab: National Wages Consultative Council To Consider Single Minimum Wage Rate

From Monday’s The Star (excerpt):

Single minimum wage proposal for all sectors, locals and foreign workers

PUTRAJAYA: The soon-to-be set up National Wages Consultative Council will look into a proposal for a single minimum wage instead of one for each sector.

Human Resources Minister Datuk Dr S. Subramaniam said on Monday that this was among pointers discussed by the various stakeholders during a week-long “live lab” on the issue.

He said the proposal was for one minimum wage for employees in the peninsular and another for Sabah and Sarawak.

Though I'm still in two minds about having a minimum wage in the first place, if we must have one, let's do it properly. A single wage rate has some advantages, especially since it substantially simplifies administration and enforcement.

There’s a good argument for adjusting a national minimum wage for metropolitan areas such as Greater KL, but that should be a subject for individual companies and industries to handle – the alternative has a host of problems, such as what happens when a person is transferred away from those areas. The legal implications can also be thorny, since it involves a potential wage cut. The issues involved in having separate minimum wage levels for the Peninsular and another for Sabah and Sarawak are bad enough.

But getting back to the issue of having a single rate versus multiple minimum wage levels for different sectors, my view is that  a minimum wage primarily functions as a social protection mechanism, and redresses the imbalance between employer and employee wage bargaining power for the lowest income class.

Having different minimum wage levels for different industries seriously dilutes the effectiveness of having a minimum wage in the first place, because it opens the National Wages Consultative Council to industry lobbying, with all that implies for the transparency and integrity of the minimum wage determination process.

Having multiple rates also reduces the credibility and effectiveness of enforcement e.g. what happens if a company is involved in two or more industry sectors with different wage scales? You can imagine the complications and the loopholes that employers can exploit.

All these will lead to delays in forcing the structural adjustments that industries have to make to remain competitive i.e. invest in employee productivity and deepen capital intensity.

The flipside of having minimum wage of course is that labour price signals will be distorted, and will become more seriously distorted the further the set rate departs from the market determined rate. And very obviously, having a single rate is more distortionary than multiple sector wage rates would be, as the latter would more closely approximate market determined wages for each sector. The implication is that having a single minimum wage rate would mean that some services will become far more expensive than their economic benefit warrants e.g. security services.

But the question that we must ask and answer as a society is: Are these distortions and costs worth the benefits? I think they are, but only under initial conditions. Here’s what I mean: You can reduce or avoid the distortionary and welfare cost impact of a minimum wage by setting it close to the market determined wage level. The problem is that you’ll only know that piece of information if there’s a freely determined market for labour wages in the first place. Once a national minimum wage is set, this information is gone until and unless the market wage actually rises above the minimum wage, in which case you don’t really need a minimum wage anyway. And if the market wage falls below the minimum wage set, then price distortions and welfare costs (i.e. unemployment) will worsen the further down it goes, but you have no way to judge what adjustments should be made.

There’s some complications for macro management as well, because since nominal wages are downward-sticky, a minimum wage places more of a burden of price adjustment on the exchange rate – but changes there means the burden of adjustment falls unevenly throughout the economy, rather than on the sectors that most require it.

A nice conundrum.