NWCC: Can They Speak Econoenglish?

Now that the NWCC has started meeting, we’re on a countdown to implementing a minimum wage for Malaysia. The composition of the Council puzzles me though.

From todays The Star (excerpt):

Vote for a minimum wage across all sectors
Friday Reflections - By B.K. Sidhu

RAISING the retirement age and implementing a minimum wage are topics that hogged the limelight this week…

…The Government has finally agreed to set a minimum retirement age for the private sector, though, the age has not been specified, but 60 will be a good start…

…Despite initial setbacks, the National Wages Consultative Council Bill was gazetted on Sept 15 and comes into effect on Sept 23. With that, the National Wages Consultative Council (NWCC) had on Wednesday appointed 25 members to start working on recommendations on a minimum wage. They have 2 months to come up with a proposal since the Government's target to announce the minimum wage for workers is before year-end.

Former Chief Judge of Sabah and Sarawak Tan Sri Steve Shim Lip Kiong is the chairman of NWCC and former Human Resources Ministry secretary-general Datuk Dr Syed Mohamad Syed Abdul Kadir his deputy. The council has six members representing workers and employees, five from other sectors and five from the Government and a secretary.

This is absolutely related to my post from last night – if you look at the members of the NWCC (with the caveat that they aren’t identified, so we don’t know for sure), notice someone missing? We have reps from the government, from workers and from employers…and nary a labour economist among them.

Who’s going to translate stuff like this for them (abstract)?

Optimal Minimum Wage Policy in Competitive Labor Markets
David Lee, Emmanuel Saez

This paper provides a theoretical analysis of optimal minimum wage policy in a perfectly competitive labor market. We show that a binding minimum wage -- while leading to unemployment -- is nevertheless desirable if the government values redistribution toward low wage workers and if unemployment induced by the minimum wage hits the lowest surplus workers first. This result remains true in the presence of optimal nonlinear taxes and transfers. In that context, a minimum wage effectively rations the low skilled labor that is subsidized by the optimal tax/transfer system, and improves upon the second-best tax/transfer optimum. When labor supply responses are along the extensive margin, a minimum wage and low skill work subsidies are complementary policies; therefore, the co-existence of a minimum wage with a positive tax rate for low skill work is always (second-best) Pareto inefficient. We derive formulas for the optimal minimum wage (with and without optimal taxes) as a function of labor supply and demand elasticities and the redistributive tastes of the government. We also present some illustrative numerical simulations.

Mind you, that’s from the abstract. Here’s part of the analysis:

Let us now derive the optimal minimum wage when the conditions of Proposition 1 are met. As displayed in Figure 1b, with a non infinitesimal minimum wage w > w¹, we can define w as the reservation wage (or equivalently, the cost of work) of the marginal low skilled worker (i.e. the worker getting the smallest surplus from working). Formally, w is defined so that h⁰₁ P₁(w) = D₁(w). The government picks w to maximize

[Long Lagrangian equation that doesn’t translate to HTML]

subject to the constraints that w_i = ∂F/∂h_i for i = 1, 2, the no profit condition h₁w₁+h₂w₂ = F(h₁, h₂), and h₂ = h⁰₂P₂(w₂). This maximization problem is formally solved in Appendix A.1.

In order to obtain an intuitive understanding of the first order condition for the optimal minimum wage w, we consider a small change dw around w. Figure 1b shows that this change has two effects.

First, it creates a transfer h₁dw toward low skilled workers at the expense of high skilled workers (as h₂dw₂ = −h₁dw from the no-profit condition (5)). Using the definition of g_i introduced earlier, the net social value of this transfer is dT = [g₁ − g₂]h₁dw.

Second, the minimum wage increases involuntary unemployment by dh₁ = D₀₁(w)d w = −η₁h₁dw/w. Using the efficient rationing assumption, those marginal workers have a reservation wage equal to w. Therefore, each newly unemployed worker has a social welfare cost equal to G(w−w)−G(0). We can define g^e₀ = [G(w−w)−G(0)]/[λ · (w−w)] as the marginal welfare weight put on earnings lost due to unemployment. Thus, the welfare cost due to unemployment is dU = −g^e ₀ · ( w − w) · η₁ · h₁d w/w.

Get all of that?

While you can probably derive some understanding from the abstracts and the conclusions of research such as the above, there’s also the need for someone who actually understands the theory and application to scrutinise the models and assumptions made in the reports used as the basis for decision making. In other words, somebody to translate into English (or Bahasa or Cantonese or Tamil as the case may be).

The fact is – in policies such as a minimum wage, no one size fits all, and without an understanding of context and circumstances (extremely important in empirical work), you risk coming to the wrong policy conclusion.

Also note that this particular paper implies tax and transfers to offset the social welfare loss from unemployment created by a minimum wage – I don’t see that option on the policy menu discussion here at all.

Technical Notes

David Lee, Emmanuel Saez,“Optimal Minimum Wage Policy in Competitive Labor Markets”, NBER Working Paper No. 14320, September 2008