Sunday, April 08, 2007

Minimum Wage issue

Title: Minimum wage is about providing decent income for the workers.

I refer to the letter Minimum wage not a cure-all.
In short, Rajan claims that by legislating minimum wage, unemployment would increase and the minimum wage law would hurt the very group it is designed to help. That would be true if we set minimum wage at a high rate.
Labour cost is only a portion of total cost of production of good and services. Capital cost, patent, licensing and transportation are some of the factors influencing total cost of production. We should concentrate of moving up the economic ladder, investing more in capital hence improving labour productivity. Instead of competing in terms of labour cost, the lowest unskilled labour cost I might add, we should compete to reduce capital, bureaucracy and transportation costs, the other factors of production.
For example, lowering the cost of capital (lower interest rate) and simplifying bureaucracy go a long way towards improving business profitability and our country’s competitiveness.
We, as citizens of a country, refrain from concentrating wealth to small select group of citizens, and try to reduce the gap between rich and poor. Minimum wage law is just a small step toward this. Its about providing decent income for our workers. Its about preserving self esteem, that everyone’s contribution is valued in our society. Its about projecting the message that no one is being disenfranchised in our society. Its about social justice.
Not so long ago I read a report in Malaysiakini about the bonded labourer (another term for slavery) at some palm oil estates in Pahang. Even though people are supposedly free to seek higher wages ‘elsewhere’, for some people, this is not possible because the barriers are too difficult to overcome. Problem with housing, language barrier and identity card etc. Should we just leave them making RM200 a month even though they work 10 hours a day 6 days a week and let their employer rake most of the profit?

Opponents to Minimum Wage are typically from elitist and bourgeois background, who may study at ‘elite’ and ‘prestigious’ SMU, their dinner spending may equivalent to a month’s wages of the lowest income group. Yet they scoff the idea of paying more to their fellow countrymen who work at the same establishment where they eat.

Last week Chinese Govt began cracking down on foreign firms who pay their employees below minimum hourly wage of USD0.73 equivalent. About RM2.52 per hour.

Milton Friedman proposed Negative Income Tax (NIT) during Nixon era, but he opposed it when Congress was going to implement it was packaged with other measures. Yes, Milton Friedman opposed NIT!
NIT requires considerable reporting and supervision, bureaucracy in another word. It provides Guaranteed Minimum Income (GMI), which provides money to survive on.
If survivable income in Seremban is RM500 per month (just enough to pay room rent, food, power and water) then GMI should be RM500. If Rajan is working 10 hours a week and get RM3 per hour, then he should get top up of RM365. Fair enough, but this doesn’t encourage Rajan to seek full time employment, since any amount he earn, as long as its below RM500, he will get RM500. So he might as well work less.
Technically employers could pay wage of RM0.50 per hour (remember, there is no minimum wage), and it still doesn’t encourage the workers to seek other employment. Workers would be happy getting their survivable income and stay in their jobs, companies raking huge profits but the government and taxpayers would be saddled with ever increasing wage subsidy. This would result in higher and higher tax rate for the taxpayers. Sure there would be no unemployment.
I don’t think this is the path we are after.
In Western countries, Minimum Wage is complemented with Guaranteed Minimum Income, in such a way that it encourage the unemployed to seek and gain employment. Even the fabled free market USA has Minimum Wage Law in place.

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