Minimum Wage Revised Part I: Theoretical Considerations

So the government has finally announced a new revision to Malaysia's minimum wage, two years after the last one. This time though, it's a whopping 25% increase to RM1,500, from the RM1,200 in 2020. Even after all these years (nine to be exact), the minimum wage continues to be the subject of a lot of arguments, so I thought I'd lay out some of the theory and Malaysian evidence (such as it is).

First of all, what we learned in Econ 101 is that when you establish a price above that of the market determined price, quantity supplied increases while quantity demanded decreases, and the market does not clear. In the context of labour, this implies higher unemployment, as more people are willing to work, but less employers can afford to take them on. But in empirical studies, this generally does not happen with the minimum wage. Why?

Zero-Sum Productivity

Lord Adair Turner has a lovely article on the future of productivity (excerpt):

Is Productivity Growth Becoming Irrelevant?

LONDON – As the Nobel laureate economist Robert Solow noted in 1987, computers are “everywhere but in the productivity statistics.” Since then, the so-called productivity paradox has become ever more striking….

…As we get richer, measured productivity may inevitably slow, and measured GDP per capita may tell us ever less about trends in human welfare….

…Our standard mental model of productivity growth reflects the transition from agriculture to industry….

No 47 In My List of Reasons Why Productivity Gains are so Difficult

From a batch of NBER working papers a few weeks ago (abstract; emphasis added):

CEO Behavior and Firm Performance
Oriana Bandiera, Stephen Hansen, Andrea Prat, Raffaella Sadun

We measure the behavior of 1,114 CEOs in Brazil, France, Germany, India, UK and US using a new methodology that combines (i) data on every activity the CEOs undertake during one workweek and (ii) a machine learning algorithm that projects these data onto scalar CEO behavior indices. Low values of the index are associated with plant visits, and one-on-one meetings with production or suppliers, while high values correlate with meetings with high-level C-suite executives, and several functions together, both from inside and outside the firm. We use these data to study the correlation between CEO behavior and firm performance within the framework of a firm-CEO assignment model. We show results consistent with significant firm-CEO assignment frictions, which appear to be more severe in lower-income regions. The productivity loss generated by inefficient assignment is equal to 13% of the productivity gap between high- and low-income countries in our sample.

In short, 13% of the productivity difference between rich and poor countries is due to having roughly 17% of CEOs in poorer countries not spending their time properly (relative to their industry).

And people think it’s about robots.

Technical Notes

Bandiera, Oriana & Stephen Hansen, Andrea Prat, Raffaella Sadun, "CEO Behavior and Firm Performance", NBER Working Paper No. 23248, March 2017

Wages, Productivity and Growth

I’ve been meaning to write about this, but life and work kept getting in the way. Makes for a good story, except its almost totally wrong (excerpt):

High wages flash recession warnings in Singapore

...Indeed, while the city state's economy is expected to grow between 1-2 percent for the year, analysts say the wage-cost pressures are flashing warnings of a recession.

At roughly 43 percent of gross domestic product - though below the 55 percent world average - wage costs in Singapore are now at levels which historically had preceded recessions in 1985, 1997 and 2001.

The trouble is that the higher wages are raising business costs at a time when export-oriented Singapore has been hard hit by a cooling China, subdued domestic consumption, a downturn in commodities and global uncertainty due to Britain's vote to leave the European Union....

The Power of Narrative

I remember getting into a forum argument on this issue more than a decade back (excerpt):

Opinion: Think nothing is made in America? Output has doubled in three decades

The U.S. manufacturing sector doesn’t get any respect.

Ask a random sample of people on the street and you’re likely to hear that America doesn’t make anything anymore, that China, Mexico and Vietnam took all of our factories, and that the only jobs left in America are flipping burgers and cleaning hotel rooms.

“Throughout history, at the center of any thriving country has been a thriving manufacturing sector,” says presidential candidate Donald Trump. “But under decades of failed leadership, the United States has gone from being the globe’s manufacturing powerhouse — the envy of the world — through a rapid deindustrialization.”

As with all myths, there’s some element of truth in what everyone says.

Adventures In Measuring Productivity

Noah Smith has a headache (excerpt):

Big TFP data mystery!

I had been under the impression that over the last three decades or so, the rich countries had all experienced similar rates of TFP growth. My source for that was the OECD's time-series on multifactor productivity (another name for TFP).....

The Impact of Foreign Labour

It’s no secret that Malaysia plays host to a lot of foreign labour; a lot of cheap foreign labour. Among the criticisms of this happenstance is that it takes away jobs from locals, reduces the wages locals can command, and stunts productivity growth.

Underlying these concerns is a false view of the economy, that labour competition between foreigners and locals are a zero-sum game. The first concern isn’t true – given our ridiculously low unemployment rate, there’s not a lot of evidence that foreigners have taken jobs away from locals. Culling foreign labour from Malaysia would only reduce output, and remove industries that would only exist (or exist as cheaply) from the availability of that foreign labour.

Minimum Wage Review

It’s been two years since the implementation of Malaysia’s minimum wage policy, and it’s now up for review (excerpt):

Review on minimum wage policy

THE minimum wage policy is up for a scheduled review this year and the trade unions are asking the Government to increase the current floor of RM900 a month by 30% to RM1,200….

…Minister in the Prime Minister’s De­p­artment Datuk Seri Abdul Wahid Omar said in September last year that the Government is loooking at gradually increasing the ratio of wages to gross domestic product (GDP) from 33.6% in 2013 to 40% in the long term.

Wages and Productivity

DS Wahid on the share of wages in GDP (excerpt):

Govt planning to push wages-GDP ratio to 40%

KUALA LUMPUR: The Government is planning to increase the ratio of wages to Gross Domestic Product (GDP) from 33.6% last year to 40% in the long term.

Minister in the Prime Minister’s De­p­artment Datuk Seri Abdul Wahid Omar said this would be done gradually.

“This is because any wage increase must be supported by increase in productivity,” he said after attending a media appreciation ceremony with the Statistics Department yesterday…

The Impact Of The Minimum Wage

We’re a few months into Malaysia’s experiment with a minimum wage, and there’s we’re already seeing some effects, at least for the manufacturing sector:

Productivity Is Very Important; Except When It Isn’t

Paul Krugman once said,

“Productivity isn’t everything, but in the long run it is almost everything.”

From a theoretical perspective, this is absolutely true. Every widely accepted model of economic growth from Solow onwards, has at its heart the concept of productivity. While you can get away with just adding inputs like capital or labour to increase output, sooner or later you run into diminishing marginal returns. In the long run then, the only source of real growth is productivity.

Intuitively, productivity is hardly controversial either – the more you make and sell from the same set of inputs, the more profits and wages and earnings you can make. Common sense, right?

Japan’s Lost Decades? Not Quite

From the East Asia Forum (excerpt):

The missing piece in the puzzle of Japan’s lost decades
Ippei Fujiwara

Japan’s average GDP growth rate was around 9.5 per cent between 1955 and 1970, and 3.8 per cent between 1971 and 1990.

But in the past two decades it has dropped to just 0.8 per cent a year. This big drop in the growth rate is synonymous with ‘Japan’s two lost decades’…

Economic Development A’la McDonalds

I promised to write a post on a Bloomberg article I read a couple of days ago, but was too busy to get down to it (you’ll see why in the next post).

But this article – really about the working paper its based on – is pretty fascinating (extract):

The Big Mac Theory of Development

It’s a question richer people have about their poorer neighbors: Why are they poor? Is it circumstances, or is it some kind of moral or intellectual failing? Is it that they never had a chance to cross from the wrong side to the right side of the tracks, or that they never had the motivation to cross? The subject colors thinking about international development as well. Is poverty in Africa and Asia the result of something about individual Kenyans or Pakistanis, or is it instead something about Kenya or Pakistan? Is it about the people, or the place?

A new paper by Princeton Economist Orley Ashenfelter for the National Bureau of Economic Research sheds some light on this debate. It compares the wages earned by staff working at McDonald’s (MCD) franchises around the world. Ashenfelter studies what McDonald’s employees earn against the cost of a Big Mac in their local franchise. The Big Mac is a standard product, and the way it’s made worldwide is highly standardized. The skill level involved in making it (such as it is) is the same everywhere. And yet, depending on where they live, crew members from all parts of the world earn dramatically different amounts in terms of Big Macs per hour…

No Datuk Seri, Restricting Competition Doesn’t Encourage Higher Productivity

I think I’m going to barf (excerpt):

Local veggies only by 2015

KOTA BARU: All farmers’ markets and National Agribusiness Terminal (Teman) outlets will no longer be allowed to sell imported vegetables by 2015.

This move is to give support to the local farmers, said Agriculture and Agro-based Industry Minister Datuk Seri Noh Omar.

“From 2015, all farmers’ markets and Teman outlets should source their vegetables locally.

“The move will indirectly encourage productivity in the country’s agricultural sector.

December 2011 Manufacturing: Something Really Strange…

Along with yesterday’s IPI report, DOS also released the December stats for the Manufacturing sector. And there’s something really strange about the numbers, specifically total wages (RM millions):

Productivity and Capital Intensity

I’m almost all the way back – I spent very nearly the whole weekend redoing my whole computer setup, and its very nearly done. It’ll still be a while before I’m posting regularly though, and there’s a lot to catch up on.

In the meantime, here’s a graph to chew on – capital intensity in Malaysia (RM millions per worker):

One of the concerns continually raised over the years has been the level of productivity and value added in Malaysian industry. The above graph is derived from the new capital stock estimates released by the Department of Statistics and labour force data.

Productivity Growing; Wages, Not So Much

From yesterday’s news (excerpt):

M'sia on track for 4.7% labour productivity growth

PETALING JAYA: Malaysia is on track to achieve the target of 4.7 per cent growth in labour productivity this year, said International Trade and Industry Deputy Minister Datuk Mukhriz Mahathir.

He said Malaysia's productivity level or output per employee last year at US$13,577 was 3.3 times higher than China's and 4.7 times higher than Indonesia's.

"However, comparisons with the productivity levels of more advanced countries in the region such as Korea at US$33,628 and Singapore at US$54,556 confirm that there is still room for improvement," he told reporters today after officiating the Productivity & Innovation

Conference and Exposition 2011 here today. Mukhriz said Malaysia needs to benchmark its productivity level against countries like Korea and Singapore which are doing better, adding this is where the focus on productivity and innovation comes to play…

Wages, Labour and Output

I’ll be off travelling for the next couple of days, so don’t expect any posts until next week at the earliest. I’ll do my best to at least note any newsworthy economic news, but I might be too busy to keep up.

In the meantime, this post should serve to keep people occupied (and probably upset) until I get back.

In economic theory, the production of goods is considered to require a number of inputs including labour, capital and raw materials. Land could be considered as well, but I’m going to lump it under capital, because that’s how the data is categorised.

Under perfect competition and assuming a Cobb-Douglas production function with constant returns to scale, each input “earns” the value of the effort/cost that goes into making something. In other words, if labour contributes some portion of the value that goes into each product, its share of the revenue earned should be in proportion to that contribution. In technical terms, labour is supposed to earn its marginal product, and capital and the other inputs their marginal product.

In English: if output per worker increases, wages per worker should increase by the same ratio.

Global Low Wage Growth: Some Evidence

I don’t think I’ll take this as proof positive that labour compensation has lagged productivity globally but Dani Rodrik sends us to an interesting paper from employmentpolicy.org (excerpts from the introduction):

In the three decades after World War II, a central feature of the American economy was a mass upward mobility in which each generation lived better than the last, and workers experienced earnings gains through much of their careers…The central drivers of mass upward mobility were real wages for most workers that grew in line with overall labor productivity…

…The alignment of wage growth and productivity growth resulted from two main factors: labor markets for most groups of workers in which demand matched supply, and the post-World War II Social Compact that emerged from the Great Depression helped to propogate [sic]wage norms throughout the economy, norms that were enforced in part through collective bargaining and professional personnel/human resource management practices.

By the 1980s, both of these factors had reversed. Labor demand increasingly shifted toward more educated workers – particularly well-educated women. At the same time, the post-war Social Compact was challenged by the inflationary 1970s and collapsed in the 1980s. Nothing has emerged to replace it.

Now, in the absence of a labor market boom like that of 1996-2000, increased labor productivity no longer translates into rising real wages for many groups of workers…

Productivity Includes Doing Things The Right Way

I swear I’m not an English grammar nazi – really, I’m not!

But you’d expect a government report (even if it comes from an ostensibly independent body) that’s meant to inform the public, to at least be reasonably edited and proofread.

Sadly, the Productivity Report 2010/2011 issued on Thursday by the Malaysia Productivity Corporation is littered with grammatical errors. For example:

Malaysia’s journey towards achieving high income economy was gaining momentum as reflected by a remarkable leap in its competitiveness ranking from 18th position in 2009 to 10th position in 2010. The impetus to achieve developed nation aspiration was further supported with the launching of several national programmes in 2010.

…and these are just the first two sentences of the report proper. And the punctuation!?! Or rather, the almost complete lack of it.

I got through maybe half of it before giving up from sheer annoyance.