Minimum Wage Laws – A Post Labor Day Article
The Minimum Wage Law is a legislation that requires an employer to pay an amount no less than what the law sets for an employee’s hourly or daily wages. In the Philippines the minimum wage set for non-agriculture employees is Php404; for Agriculture and other industries it’s Php367 for a day’s work.
When looking at Minimum Wage Laws in the eyes of a worker, it is a great benefit because it increases income, thus Purchasing Power. This is the same reason why Labor Unions, which are representatives of workers in specific industries, have a huge role in endorsing and passing Minimum Wage Laws in our country.
However, that Labor Unions are able to achieve the goal of raising Real Wages and the wellbeing of its constituents in the long term through Minimum Wage Laws is one big delusion.
What are Minimum Wage Laws for?
Minimum Wage Laws’ main goal is provide protection from the evils of low wages. For example, a fishing company in a certain region where fishing is the main economic activity, due to its monopoly status, offers only to pay its workers a certain amount, say Php300/day, which is considered lower when compared to the same type of employment in other regions which employ workers at Php350/day. Because people who reside in this region have no other options for employment other than this fishing company, they are forced to accept these terms and take home a lower wage rate. This is where setting a Minimum Wage becomes crucial—so that those who work in the fishing company are still paid a “fair” amount for their labor.
However, as Henry Hazlitt puts it, “…the possible good to be achieved by such a law can exceed the possible harm only in proportion as its aims are modest. The more ambitious such a law is, the larger number of workers it attempts to cover, and the more attempts to raise their wages, the more certain are its harmful effects to exceed any possible good effects.”
Unmasking Minimum Wage
When one looks at Minimum Wage, one would immediately say that it is beneficial, after all it raises a person’s income. This however only takes to account the view of the employee but NOT the aggregate economic community.
- Higher Minimum Wages discourage consumption and production. Higher wages entails that companies or employers are levied higher costs to produce their goods and services. It could be argued that this additional cost can be augmented by selling the goods and services at a higher price. (1) However, increasing prices can cause consumers to either find substitutes from cheaper products OR consume less of the products. (2) On the other hand, the consequence of not increasing the price of products and services would lower the income of producers, and could possibly drive them out of business, (3) which is another way of causing unemployment. (4) In addition, the companies being driven out and industries failing means the loss of products and services that may be essential to some consumers.
- Minimum Wage Laws encourage unemployment. For example, if our government passed a law that states that a carpenter should not be paid an amount no less that Php450, this means that an employer would only employ a certain Juan who he thinks is worth Php450. If an employer feels that a certain Pepe’s services are only worth Php400 (because say he only has two years of experience as a carpenter) and the wage law is barring the former from hiring the latter: Why would the employer hire Pepe who he thinks is just worth Php400 if he is required to pay him Php450? Aside from being (1) unemployed, (2) Pepe is also deprived to earn the moderate amount in accordance to his abilities. In addition, suppose the employer only wants moderate abilities for the tasks he requires and would have been happy to hire Pepe for Php400. (3) The employer is also worst off because he is forced to hire a better carpenter, whom he doesn’t need, for a higher price.
- Minimum Wage benefits one industry but harms another. In the case of Pepe, because no one wants to hire him as a carpenter, he is forced to work as a farmer which is willing to pay less for his services than if he were to work as a carpenter for Php400. People like Pepe who shift to a lower-paid industry will in turn increase that industry’s competition thus lowering its wages even more.
- Minimum Wage Laws increase prices and is thus a double-edged sword. There was a poll in TV Patrol (a Philippine News Telecast) a few weeks ago regarding whether people wanted an increase in their wages or a price control in petrol. People chose price control over gas because they commented that the increase in their wages would be offset by increase in costs anyway. Price control is a different topic to be discussed, but the argument remains: increased wages causes increased prices on goods and services, and thus a zero if not negative Net Purchasing Power and increase in wealth.
If Minimum Wage Laws do harm than good, then what is the key to increase wages?
The best way to raise wages is by increasing marginal labor productivity. The more one worker produces, the more it adds wealth to its community. This can be done in many ways such as increasing machines to aid production, more efficient and improved management of operations, or better educated and trained workers—any activity that would increase production and profits and would encourage companies and industries to expand.
Conclusion
Many reformers and Labor Unions behind the Minimum Wage Laws are driven with emotional bias and notions of philanthropic purposes. However, it is now clear that Minimum Wage Laws, even with its definite purpose, when applied more than moderation (which is often the case) does more harm than good in the long run. So instead of supporting Unions on its drive to raise Minimum Wages, endorse laws which encourage production instead.
Post Scriptum: The references and arguments for this article came from Henry Hazlitt’s book “Economics is One Lesson.”
P.P.S. I was supposed to make and post this yesterday, May 1, 2011, as a Labor Day article. I decided to rest instead—after all it’s supposed to be a working holiday.
P.P.P.S Editors would be angry with my loooongg sentences. All I can say is that I tried by best in simplifying these notions.
P.P.P.P.S. If you finished this long and seemingly tedious article. Thank you!
I suddenly missed my DS classes and Sir Leland. Thanks Ate Jo! :)
interesting
