5 major hidden flaws of minimum wage

These are some of the hidden negative effects a strict and inflexible minimum wage policy can have on an economy.

Is Singapore ready to pay the price?

1. It slows down the job market

Non-progressive minimum wage laws can cost the economy thousands of jobs. Minimum wage not only makes workers too expensive to hire, it also disrupts the principle of “supply and demand” by artificially increasing the number of people who will potentially want a job. If, for instance, a cleaning job at S$100 per hour is advertised, the number of interested – and rejected – candidates will be much higher than for the same job advertised at S$10 per hour.

2. It is inconsistent

In most countries with strict minimum wage laws the implementation and conditions of said laws tend to vary greatly. The wage can be set according to industry, set of skills, level of qualification, place of residence, family situation, etc. This means that the minimum wage can be an opportunity for some (those that are fully aware of how the system works) and a lost opportunity for others (those that don’t know enough to fend for themselves).

3. It hurts those that need it the most

Teenagers, workers in training, college students, interns, part-time workers, and those without experience or qualifications all have their options and opportunities limited by the minimum wage. Low-paying jobs remain the main entry point for those with few marketable skills, and enforcing a strict set of minimum wage laws alienates them from such possibilities; as an employer, one will necessarily look for the most capable or qualified person for a job that’s been paid higher than it is actually worth.

4. It increases prices

When employers are forced to pay employees a static and standard wage, they inevitably pass the higher cost onto the consumer. As the cost of producing consumer goods rises, so does the good’s price, which eventually leads to decreased purchasing power for both the company and the consumer.

5. It kills small businesses

Mandating a certain minimum wage can make it difficult for new or small businesses to grow and expand. Those that are able to cope with the rising operational costs tend to limit employee hours and expect of them that they do more in less time. Minimum wage also decreases the chances an employer will be willing to take by hiring and training a new employee.

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Najib A.

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5 Comments

  • Re your points:

    1. What do you mean by “slow down” the job market? You mean there is a rise in supply, and a fall in demand, leading to unemployment?

    Well, in some industries demand is inelastic (esp in the short run), and will not fall, so supply is greater than demand at min wage price.

    Also, in cases where demand is elastic (esp in the long run), that is good, because it shows that the firm can switch from labour inputs to capital inputs, in the long run this improves labour productivity.

    Curiously, a minimum wage sometimes reduces how much people want to work. With a min wage, some people will opt to work less hours, or spend their time studying, or home-making, or retiring (not hard to imagine in Singapore?). This needs to be taken into account.

    Finally, what happens to “excess” labour – those who wish to work, but cannot find employment? I argue that to leave them alone, to let the free market decide, is inefficient and a waste of society’s resources. They should invest in skills upgrading so they can be employed again – and society or government should coordinate the investment in their skills to meet the expected needs of industry.

    2. I don’t understand what you mean here. How is a minimum wage more difficult to understand than all the weird schemes the PAP has been trotting out? WCS? CPF? TAFEP? Workfare? ABCDEFG acronyms galore?

    3. Most of these people you mention work outside of the formal workforce anyway, e.g. internships, on-the-job training, apprenticeship arrangements. In many cases they’re not treated as earning wages (their income might not even be declared as such, or is taxable).

    The exception are those without qualifications and training – indeed these people will be retrenched first if demand for labour falls. Which is why in responding to (1) I suggest the need for society to (re)invest in our human beings.

    In the case of students – some of them would leave the workforce in response to minimum wage laws – if their homes earn enough after min wage implementation, and they no longer need to supplement household income, and they can then focus fully on educating themselves to join the workforce in the long run. This is a good thing.

    4. It increases nominal prices (i.e. inflation), but if it shifts distribution of wealth, then equality measured in spending power might improve too.

    5. Um, don’t agree. Small businesses will face such problems whether or not we have minimum wages. Small businesses are just different in nature from big ones – they’re more adaptable and flexible, but they also have shallower pockets and poorer credit access.

    In fact – doesn’t the research show that big firms retrench more than small ones when min wages are implemented? (http://en.wikipedia.org/wiki/Minimum_wage#Empirical_studies – see David Neumark and William Wascher in response to Card and Krueger)

  • Hi eremarf,

    Thanks for your comment!

    Yes, minimum wage is a complicated policy to implement, not only because studies on the subject reach many different conclusions, but also because the people who’ll be affected by the changes all want something different out of them.

    The main issue I have with a universal minimum wage policy is the fact that once it’s in place it’s really hard to go back on it should negative side effects arise. IMHO the best bet is to gradually implement a model that 1. allows for subsequent adjustments and 2. satisfies the needs of different professions as they evolve over time.

    – AL

    • Well, I can agree that the jury is still out on minimum wage, but how do you think the wage-bargaining process should be done in Singapore? Do you think empowering workers in various ways, e.g. lifting restrictions on labour union organizing, lifting restrictions on civic protests, lifting restrictions on press freedom, etc so as to shift the balance of power towards workers and away from employers is a better way to sort the problem out?

      ***

      I personally think empowering people (including workers) benefits not just the wage-bargaining process, but lots of other kinds of public discourse, consensus building, crowd-sourcing of ideas, etc. The benefits are numerous – and I think achieving these (empowering people) should be receiving more attention from Singaporeans who care about Singapore.

      ***

      I can see why the focus is now on minimum wage, however. It’s the fast, direct solution to the immediate problem of (our famously undefined) poverty, or let’s just call it poor living standards. And poor people are impatient with the PAP who has let living standards slide for a decade. They are short of time, and short of faith in the PAP – and I can see why.

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