Legislating a minimum wage; is it practical?

by Dinesh Weerakkody

For years there was a belief among many trade union officials that the working class is being left behind. Either it is the EPF getting plundered or that wage increases are insufficient, while the rich get richer. With elections over the time has now come to tell how they hope to address this income divide.

In general, unions invariably propose increasing the minimum wage (whatever way you define it), while the tripartite partners are still to agree on a definition for the minimum wage and how much it should be.

While certain politicians are in favour of raising the minimum wage, they have been vague about how large an increase they would support. It's still too early to say how a hike will affect the job market, because the preliminary data we have, is not reliable.

Helps the employed

However, there is evidence globally that irrational minimum wage increases have led to the loss of service jobs. For example, in 2014 the congressional Budget Office in the United States found that increasing the minimum wage to $10.10 an hour would result in employment falling by 500,000 jobs nationally.

University of California-Irvine economist David Neumark recently pointed out that less than 20% of the earning benefits would flow to people living below the poverty line.

Such minimum wage laws often help people who have jobs and those who manage to keep their jobs, but hurt those without a job.

If minimum wages helped alleviate income inequality, you'd expect to see a lot of that in the US and UK. It's understandable that people who have jobs would like a raise. But what about the people who don't have jobs? The national labour-participation rate and a wage increase means little to those who aren't in the labour force but want a job now. The same goes for those working part time because they're unable to find full-time job opportunities.

More expensive

If the government makes something more expensive by passing legislation, businesses that have no choice will use less of it. They will also pass on what consumers can absorb through increased prices. Entry-level jobs will become increasingly scarce as businesses use labour more efficiently and in some cases, turn to automation.

Economic growth

So what's the solution? The first step is realizing that income inequality is a symptom of a larger problem. Wage increases may appear sympathetic and for a moment alleviate the headache, but it won't cure the real problem. The real problem is the crowding out of the private sector for over five years which has eliminated opportunities.

When political leaders talk about spurring economic growth by reducing regulation, reforming the tax code, pro-growth, public service reform and improving skills and education, they are addressing the underlying problem that drives income inequality and helps the working class and finally grow the economy.

There is only one thing that will decrease poverty and increase economic opportunity: economic growth. And history has clearly shown that there is only one system that can produce economic growth sufficient to meaningfully reduce poverty and increase opportunity: free enterprise. The best development for workers would be a thriving economy in which companies have to compete to sell their products and services and the government stays out of running enterprises and also allows the private sector to operate as free enterprises.

The writer is a thought leader in HR