Loose Change by Ben Kritz WITH rising prices of basic goods, fuel, and electricity, the always contentious issue of minimum wages has aga...
Loose Change
by Ben Kritz
WITH rising prices of basic goods, fuel, and electricity, the always contentious issue of minimum wages has again become part of the public conversation, and understandably so. Minimum wage is not nearly enough to support a modest lifestyle even in the best of circumstances, and for tens of millions of Filipinos, circumstances now are not even good, and are getting harder every day.
Increasing minimum wages seems like an obvious solution to ease the burden of higher costs of living, but in reality would accomplish very little. That is because the “minimum wage” is a fundamentally flawed concept; it is, in economic terms, the wrong tool for the job it’s intended to do, and will never work correctly.
When minimum wages were first introduced in the early part of last century – there had been a few experiments with it even as far back as the mid-1800s in Great Britain – the intention was to mandate exactly what workers now believe “minimum wage” should mean: A minimum amount of pay for work, so that the worker is assured of earning enough to support himself and his family. In other words, the “minimum wage” was meant to be a “living wage,” and those two concepts are still jumbled together today, which is the source of most of the disagreement over minimum wages.
Minimum wage is a form of price control, one that sets a minimum price of a unit of labor; here in the Philippines, one unit is equal to one day’s work, which is why the minimum wage is set as X amount per day. An employer can use the minimum wage as a factor in calculating his costs to produce the goods or services he’s selling, along with other factors like raw materials, water and electricity, delivery costs, the lease or mortgage payments on his store or factory, and so on.
Other factors can change the cost of the employer’s labor input, so that it might be higher than the minimum wage. If there is a shortage of workers and the employer has to compete with other employers for a limited a supply, the price of a unit of labor would go up. A shortage might come about because there simply aren’t enough workers, or the employer’s work requires specialized skills, which fewer available workers have.
Just like any other input, if the price of a unit of labor becomes too expensive the employer can’t provide his goods or services at a price that is competitive without losing money, and so either has to find a cheaper substitute for the labor unit or stop doing business entirely.
According to economic theory, which would work more often than it does if people would just stick to it, the way that policymakers should ensure that doesn’t happen as a result of the minimum wage is to calculate the wage from the perspective of the demand (employer) side of the equation. That means taking into account the total amount of available labor, the total demand (number of available jobs), and the skills required for each job, which can be quantified in terms of providing a fair return to the worker for his investment in acquiring those skills.
The obvious problem with that is that it’s just too complicated; it would mean setting a minimum wage for every job at every employer. So in order to accomplish anything, policymakers have to settle for a different method, one that doesn’t actually work and doesn’t satisfy anyone. I’ll explain that in Part Two of this column next week.
Ben Kritz holds a Master’s degree in Economics and is a former auto industry executive, and writes the thrice-weekly Rough Trade column on business and the economy for The Manila Times. You are welcome to send him your questions and comments at benkritz@outlook.com, or follow him on Facebook and Twitter.
WITH rising prices of basic goods, fuel, and electricity, the always contentious issue of minimum wages has again become part of the public conversation, and understandably so. Minimum wage is not nearly enough to support a modest lifestyle even in the best of circumstances, and for tens of millions of Filipinos, circumstances now are not even good, and are getting harder every day.
Increasing minimum wages seems like an obvious solution to ease the burden of higher costs of living, but in reality would accomplish very little. That is because the “minimum wage” is a fundamentally flawed concept; it is, in economic terms, the wrong tool for the job it’s intended to do, and will never work correctly.
When minimum wages were first introduced in the early part of last century – there had been a few experiments with it even as far back as the mid-1800s in Great Britain – the intention was to mandate exactly what workers now believe “minimum wage” should mean: A minimum amount of pay for work, so that the worker is assured of earning enough to support himself and his family. In other words, the “minimum wage” was meant to be a “living wage,” and those two concepts are still jumbled together today, which is the source of most of the disagreement over minimum wages.
Minimum wage is a form of price control, one that sets a minimum price of a unit of labor; here in the Philippines, one unit is equal to one day’s work, which is why the minimum wage is set as X amount per day. An employer can use the minimum wage as a factor in calculating his costs to produce the goods or services he’s selling, along with other factors like raw materials, water and electricity, delivery costs, the lease or mortgage payments on his store or factory, and so on.
Other factors can change the cost of the employer’s labor input, so that it might be higher than the minimum wage. If there is a shortage of workers and the employer has to compete with other employers for a limited a supply, the price of a unit of labor would go up. A shortage might come about because there simply aren’t enough workers, or the employer’s work requires specialized skills, which fewer available workers have.
Just like any other input, if the price of a unit of labor becomes too expensive the employer can’t provide his goods or services at a price that is competitive without losing money, and so either has to find a cheaper substitute for the labor unit or stop doing business entirely.
According to economic theory, which would work more often than it does if people would just stick to it, the way that policymakers should ensure that doesn’t happen as a result of the minimum wage is to calculate the wage from the perspective of the demand (employer) side of the equation. That means taking into account the total amount of available labor, the total demand (number of available jobs), and the skills required for each job, which can be quantified in terms of providing a fair return to the worker for his investment in acquiring those skills.
The obvious problem with that is that it’s just too complicated; it would mean setting a minimum wage for every job at every employer. So in order to accomplish anything, policymakers have to settle for a different method, one that doesn’t actually work and doesn’t satisfy anyone. I’ll explain that in Part Two of this column next week.
Ben Kritz holds a Master’s degree in Economics and is a former auto industry executive, and writes the thrice-weekly Rough Trade column on business and the economy for The Manila Times. You are welcome to send him your questions and comments at benkritz@outlook.com, or follow him on Facebook and Twitter.
No comments