Friday, January 12, 2018

Raising the Minimum Wage

I was going to keep this for Monday, but this is too timely (excerpt):

Be Careful When Raising Minimum Wages
By Noah Smith

Minimum wages are one of the most contentious topics in economic policy. Many states and cities are experimenting with big minimum wage increases, so that there is now a lot of variation across the country...

...To many in the news media and in the world of think tanks and activists, being pro- or anti-minimum wage is akin to a religious belief. But even in the world of economics research, there’s plenty of disagreement.

A slew of recent minimum-wage studies illustrate the point...

It’s important to remember that these studies are all very limited. Some of them, like the Leamer et al. and the Allegretto et al. studies, are preliminary and subject to change once the final analysis is concluded. The studies that use synthetic controls -- Jardim et al. and Allegretto et al. -- could be wrong if they’ve chosen the wrong controls, which is easy to do. The method used by Cengiz et al. requires its own set of assumptions, which could be wrong.

At this point, anyone following the research debate will be tempted to throw up their hands. What can we learn from a bunch of contradictory studies, each with its own potential weaknesses and flaws? Some extreme cynics even see the contradictory minimum wage results as reason to doubt the usefulness of empirical economics itself.

But this is the wrong response. The right reaction to the contradictory studies is caution. Policy makers and advisers should read the whole literature, including studies that yield conclusions they don’t like. They should try to get a picture of which research methods are considered the most reliable, and why. And then they should move forward cautiously with policy, taking steps to try to help the poor, but not making the steps so big and bold that they can’t be reversed if things go wrong.

In the case of minimum wages, a majority of the evidence seems to indicate that raising the wage floor by modest amounts isn't very dangerous. That means that experiments like the ones now underway in places like Seattle should continue. But the studies showing larger harm from minimum wages boosts should be a reason not to make the increases too large or abrupt, and not to implement big hikes at the federal level. To borrow a phrase from Chinese leader Deng Xiaoping, the right approach is to “cross the river by feeling the stones.”

I'm generally supportive of the notion that the minimum wage is a necessary tool for addressing labour market imperfections and wage inequality. But there's also such a thing as pushing something too far, too fast.

One key problem with the Malaysian labour market is that, unlike in developed countries, a significant portion of the labour force is in the informal sector, where the minimum wage won’t apply and can’t be enforced. In other words, it’s not a silver bullet for the problem of low incomes. A second issue is that, in my own delvings into the impact of the minimum wage in Malaysia, the disemployment impact was statistically significant i.e. it cost jobs, even if the overall welfare benefits outweighed those job losses. So there is a very real trade-off involved. Third, the most recent minimum wage revision showed no impact at all on wages in proximity to the minimum wage level, i.e. zero welfare gains.

So the fact that Malaysia has a minimum wage at all is a positive, but let’s not get too carried away that it’s any kind of total solution. It isn’t.

6 comments:

  1. Based on your observations, how high a raise would lead to a negative disemployment impact? I mean, sure raising the minimum wage has serious implications, but then I am figuring it's not like CEOs and employers are frugal by nature either. And those guys don't seem to be adjusting in the name of better staff wellbeing either.

    Also, what would be your opinion, other than the minimum wage, to deal with the welfare benefits of workers, and this includes civil servants at the bottom of the pay grade.

    Because let's face it, pay them according to the current floor and asking them to live on roti canai and teh tarik and maggie noodles is also not going to be beneficial for us in the long run right?

    As it is, we are already no.1 on non-communicable diseases, and some findings recently have brought to light that Malaysians are working longer hours and getting less sleep than its contemporaries.

    This is not discounting that, sure, there are incompetent people in the system. But I am thinking about those who have really optimised and adjusted to current demands.

    Hmmm, would unions work? I know we have a few around, but I am thinking of something stronger, maybe one where we can organise across many different industries in a particular region?

    Then, there's no discounting that this too is a political power base. But anyhow, would like to hear your thoughts on this.

    ReplyDelete
    Replies
    1. You are discussing the issue of inequality. I recommend two areas of focus 1) equal opportunity for education and 2) using taxation and transfer to equalize disposable incomes

      On the first, 43% of the South Korean labor force has tertiary qualification or above compared to 32% in the US and 25% in Malaysia. Not surprisingly South Korea market income inequality is one of the lowest in the world. Thankfully we are going in that direction (e.g.TVET, recent improvement in university ranking) but it will take time.

      The second approach is taxes and transfer. Gini coefficient on market income of Sweden and Germany before taxes and transfers are higher than Malaysia. However, after taxes and transfer, their inequality is some of the lowest in the world. In Malaysia, BR1M is in the right direction. However, taxation is a politically charged issue so this again will take time to evolve.

      That said.. it is important to represent reality.. even when people earn RM1k per month.. they dont survive on merely roti canai and maggie noodles. Nasi Lemak daging rendang at Nasi Lemak Antarabangsa goes for RM4.50. Hearty dishes such as those are part of the low income group's diet. This means while inequality is a big issue that needs to be addressed, it is not a deal breaker issue for our country. My two cents

      Delete
    2. @notaneconomist

      The standard recommendation is not more than 40% of the average wage. For Malaysia, that would be roughly around RM1k, or more or less where we are now.

      As for other benefits, unions might help, but I doubt it. Union membership is low and declining everywhere, not just in Malaysia. The key problem here is that kind of work where unionisation is possible, is also in secular decline.

      Globally, the employment contract model of workers earning wages for their labour is gradually disappearing, in favour of more flexible work arrangements. In Malaysia, just a little over half the labour force earn wages. The rest are either in informal work, business owners/self-employed, or on contract.

      Unions aren't a solution for this segment of the work force, and may actually have negative effects, since unions prioritise the needs of their members over the needs of non-members.
      That suggests a stronger role for the state, as much as that seems anathema for many people in this country.

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    3. Thanks guys for these.

      @hishamh my only concern with the role of the state is that instead of becoming a needs-based initiative, it will be ethnically skewed.

      Some would point to BR1M as a blanket policy that reaches all Malaysians who fall within that category.

      But then look at ADAM50. Was there even a need to separate the programme to different portfolios for Bumis (ASB) and Non-Bumis (AS1M) and also put a an investment limit on these? The ASB investment limit is RM200k, the AS1M is 50k?

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    4. @notaneconomist

      For ADAM50, that's really up to PNB. It's their initiative, not the government's (actually, from what I understand, it's really Tan Sri Wahid's). In any case, those investment limits won't matter for most people - they'll never save enough over their lifetimes to hit them, and ADAM50 won't change that. The median ASB investor has less than RM10k.

      Delete
  2. You are discussing the issue of inequality. I recommend two areas of focus 1) equal opportunity for education and 2) using taxation and transfer to equalize disposable incomes

    On the first, 43% of the South Korean labor force has tertiary qualification or above compared to 32% in the US and 25% in Malaysia. Not surprisingly South Korea market income inequality is one of the lowest in the world. Thankfully we are going in that direction (e.g.TVET, recent improvement in university ranking) but it will take time.

    The second approach is taxes and transfer. Gini coefficient on market income of Sweden and Germany before taxes and transfers are higher than Malaysia. However, after taxes and transfer, their inequality is some of the lowest in the world. In Malaysia, BR1M is in the right direction. However, taxation is a politically charged issue so this again will take time to evolve.

    That said.. it is important to represent reality.. even when people earn RM1k per month.. they dont survive on merely roti canai and maggie noodles. Nasi Lemak daging rendang at Nasi Lemak Antarabangsa goes for RM4.50. Hearty dishes such as those are part of the low income group's diet. This means while inequality is a big issue that needs to be addressed, it is not a deal breaker issue for our country. My two cents

    ReplyDelete