Why those who oppose a minimum wage have got it wrong

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Lee Hwok Aun responds to two articles on a news website that opposed the idea of a minimum wage policy. Workers have tolerated our low-wage regime for far too long, he says.

 

Kwek Kon Yao and Wan Saiful Wan Jan of the Institute for Democracy and Economic Affairs (IDEAS) recently wrote two articles in themalaysianinsider.com repudiating minimum wage policy (“Minimum wage proposals hurt security guards” (10 May); “Defend the poor, oppose minimum wage” (11 May)). Their contributions to public discourse on this vital issue are welcome. However, I find their arguments, which represent common ideological objections to minimum wage, to be flawed, inadequate, and inconsistent.

Kwek and Wan Saiful both object to minimum wage in principle but do not substantiate their position based on their theoretical premises. In fact, they attempt to make their case by reference to anecdotal accounts or hypothetical scenarios.

Their articles imply that labour markets always operate in a harmonious and fair manner, to the mutual benefit of all parties; yet they abstain from explaining how they arrive at these positions. Basically, they have neglected any engagement with the assumptions of orthodox competitive market theory. Any violation of these assumptions deals a blow to the view that labour markets generate fair wages, which implies that legislated minimum wage marks a ‘distortion’. Chiefly, the theory assumes:

1. absence of market power;
2. free labour mobility;
3. wage equating with productivity.

These assumptions fundamentally shape the conception of labour market outcomes mentioned or implied in Kwek’s and Wan Saiful’s articles, which are:

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1. wages are agreed upon by willing buyer and willing seller, with no compulsion through the exercise of market power by one side;
2. if a worker does not like a wage, she is free to find another job;
3. workers with the same level of productive characteristics will be paid the same.

Do these characterise the experience of low-wage workers? The reality is far removed. Employers can deploy their market power to compel workers to accept the offered wage; workers are often not willing sellers. Many workers do not have the luxury of mobility. It is prohibitively difficult for many to simply quit and look for another job. They may not have the requisite skills to move, or the risk is too great that they may not soon find another job, which puts their families’ livelihood in peril.

Again, market power is skewed in favour of employers. Low-skilled employees derive strength in numbers, by organising (which businesses do too, through chambers of commerce or industry associations), and through state institutions like the minimum wage and employment laws.

The notion of a fair market wage also hinges on the assumption that workers with the same set of qualifications and experience will be paid equal wages – hence no one is underpaid, nor overpaid. This can easily be shown to be false in the real world, where wages vary even for identical workers. In other words, some people are being underpaid (seeing that it’s much less likely for employers to overpay).

The departure of labour markets from the serendipitous fiction of orthodox economic theory makes institutions like minimum wage necessary and right. Labour markets are inherently distorted. Minimum wage is a necessary institution for us to progress to a higher-income economy, just society, and mature democracy.

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The debate should revolve around the theories underlying market solutions versus regulations such as minimum wage, and around the practicalities for substantively and prudently transitioning to a minimum wage regime. More substantive research is clearly needed on determining a fair level, and on ad hoc programmes for aiding or retraining displaced workers.

Clarity and sobriety would enhance this discussion. Kwek laments minimum wage as a government attempt to “fix wages”. This is hyperbole. Yes, the government – representing the rakyat, which technically includes both capitalists and workers – sets a minimum, but it is not interfering with wages above that floor.

Also unsurprisingly, it seems that Kwek and Wan Saiful may find it hard to object to the idea of raising wages for the poor, based on their silence over it. They object to after-effects or unintended consequences of minimum wage, but curiously have nothing to say about the intended consequence of safeguarding a decent living for the lowest paid workers. Are they really implying that receiving at least a decent wage brings no benefit at all to society?

One last point. Wan Saiful wonders if minimum wage proponents are detached from the real lives of the lowliest of workers. I do not claim to intimately know or understand the circumstances of the working poor – though I, like Wan Saiful, have experienced my share of low-paid work.

But I would like to draw attention to the fact that the campaign for minimum wage has been spearheaded by the Malaysian Trades Union Congress, which represents low wage earners who perform largely manual tasks everyday, perhaps for their whole working lives. Workers who are vulnerable and, unlike most people who write and read articles like these, have desperately little individual bargaining power to demand a living wage. They have little choice to accept whatever wage is offered. And they have tolerated our low-wage regime for too long.

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Lee Hwok Aun is a PhD candidate in economics at the University of Massachusetts, Amherst, and a lecturer in development studies at the University of Malaya.

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