Gordon Lee /
Since the parliamentary “debate” in January this year, which saw Members of Parliament coming out strongly as a united front against implementing a minimum wage, discussions on the pros and cons of a minimum wage seem to have died down.
Government rhetoric asserts that a minimum wage policy has few merits, but significant demerits – such as unemployment, inflation and loss of competitiveness. Lee Hsien Loong was reported to have said, “Singapore has something better than a minimum wage and it is called Workfare.”
This multi-part series will examine these claims from two perspectives: economic theory, and empirical research. In this first instalment, we look at the alleged “unemployment” that is predicted to occur with a minimum wage.
Unemployment in theory
This simple textbook model is easily recognisable by A-Level economics students. Briefly, the downward-sloping demand curve shows that as wages fall along the Y-axis, firms’ demand for workers will increase rightwards along the X-axis. The upward-sloping supply curve shows that as wages increase along the Y-axis, more workers are willing to work for longer, and the supply of labour increases rightwards along the X-axis. The equilibrium level of employment in this perfectly competitive labour market is at E2, with the equilibrium wage at W1.
With a minimum wage set above the equilibrium wage (W1) at the level W min, workers are willing to supply E1 amount of labour, but firms are only willing to employ E3 amount of labour, leading to a fall in employment from E2 to E3 with unemployment as shown. So far, this is what ministers seem to be implying.
There is a problem with this theoretical understanding, as it is based on the assumption that firms operate in a perfectly competitive labour market with practically no ability to set wages. For example, fast food chains and supermarkets seem to have considerable power to determine wages, and the sector can be said to be closer to a monopsony (sole buyer with full control over wages) than a perfectly competitive market (infinite buyers each of small size with no control over wages).
Modelling the monopsonistic market is a little more complex. Although the equilibrium in the free market between Supply (S) and Demand (MRP) for labour is at point C, the monopsonist would choose to employ where his marginal cost (MC) is equal to his marginal benefit (MRP) at point A, hence employing L amount of labour instead of L’ in order to maximise profits. Since a monopsonist has the power to decide wages, he will pay the minimum amount (W) required to secure L amount of labour instead of the equivalent W’ under a perfectly competitive market.
There is also a deadweight welfare loss to society shown by the triangle ACM – which means that because resources are not efficiently allocated, the overall cost to society (in terms of both consumer and producer) is more than the overall benefit to society.
But, if a minimum wage is set at W’, than the monopsonist has no choice but to pay W’ instead of W level of wages, and in order to continue to maximise profits, the monopsonist will increase employment from L to L’. Not only is employment increased, but the deadweight welfare loss is also eliminated with a minimum wage. It’s highly counter-intuitive, but true. In some markets (which are closer to a monopsony rather than a perfectly competitive one), employment increases!
The Singapore economy is a complex one which the first textbook model cannot represent adequately. The economy comprises a mix of competitive and monopsonist markets, and though employment might decrease in more competitive markets, employment increases in more monopsonist markets, mitigating (though not necessarily eliminating) effects of employment/unemployment either way.
Unemployment in practice
“We find that minimum wages … do not have a negative impact on employment.” [1]
“To sum up, the evidence for the UK presented in this paper indicates that the effect of the introduction of the minimum wage on the probability of employment is insignificantly different from zero for all four demographic groups and in all three datasets used.” [2] (If you are interested in studying the empirical evidence further, reference [2] provides a great overview of research done so far (US, UK, France), and the results.)
Due to the mitigating effects of monopsonist markets, it is no wonder that most empirical studies show little significant overall impact of a minimum wage on employment.
In any case, as past recessions have shown (and the government is quick to point out), any rise in unemployment is partially absorbed by foreign workers. The remaining unemployment has to be weighed against the benefits of a minimum wage, which will be explored in subsequent articles.
Conclusion
While a staggeringly high minimum wage could decrease overall employment, economic theory and empirical statistics demonstrate that a minimum wage set at a modest level* has little (if any) negative effect on unemployment. Unemployment should also be weighed against achieving a country’s other economic and social objectives.
*See http://wrap.warwick.ac.uk/1560/1/WRAP_Stewart_twerp630.pdf (pg. 29) for an elaboration
In subsequent parts of this series, I aim to show that there are strong economic as well as social justifications for the implementation of a national minimum wage.
————-
References;
[1] The Effects of Minimum Wages on Employment: Theory and Evidence from Britain
HELP keep the voice of TOC alive!
If you like this article, please consider a small donation to help theonlinecitizen.com stay alive. Please note that we can only accept donations from Singaporeans. Thank you for your assistance.Do you have a flair for writing? Volunteer with us. Email us your full name and contact details to theonlinecitizen@gmail.com
mice is nice
I did not say MW contributes to couples splitting up.But its recession that u mentioned that caused them .
Of course I know the hardship and I am one of the pokkai,gianpng,worse than many of you out there .But before implementing any policy,must think properly whether it help or will it backfire else it will cause more problems instead of helping .
The policy I mean is the MW.
Those with high income may not have much problem ,talk only mah,financial expert say pay 16% to FW,pay maid MW ,you think can help local like dat?I am against becos I dun want those low wage earner being worse becos of MW.Not becos of me for I dun need maid .My company also no FWs though I work with them.
Its people like Ah Huay that I am concern.
When you have the rich elite ruling the masses, they do not understand the problems of the poor and will not support MW. Instead they will help businesses to make more profits so that shareholders like themselves have more to gain!
And they will never listen since they are filled with pride, arrogance, greed, hardness, wealth, luxury and lust! Now you know what kind of people you have voted for!
agongkia,
so what is the other recession were you talking about? please refer to your own post on 28 May 2011, lol…
lol, you talk like i am Minister Mice. but hor, with any policy, ministers ought to work hand-in-hand to formulate a slew of policies that will mini-mice chances of policies backfiring, sidefiring, topfiring, backsidefiring, etc from happening.
if you really want a ministerial level answer that will not have any backsidefire, then by all means get a new minister. get real, dun expect people to spell out full-proof policies online for free while ministers who sit & shake legs get paid millions.
& that’s where PAP of today (over the past decade) fall flat on. running out of juice?!
mice is nice
Aiya.You first say couple split becos of recession and I am just saying MW may cause it.OK.I will loso on that.
U minister meh? Whether Minister Mice or Minister Ngeow,just stop thinking of high pay and not be a phua kay, sitting on those few hundred dollars chair,look into your citizen’s problem and you will gain my respect.
Who dun know they are shaking legs and paid million.
Those in backlane oso shake legs,difference is that sometime they got to open leg n got to convert the currency if they want it in millions.
U are not wrong to say policy makers need to work hand in hand.,but you cannot expect changes overnight mah.If they are just another one ,thinking MW works becos of you people saying so,jump into conclusion just to please you people,without thinking of the consequence,then me oso can be a minister lor.
But hor,mice ah,I oredi said I want to CHOW from you during my first comments here ,how come we still her ah.Next debate can or not?are we on the topic?
agongkia,
s there isn’t another recession you mentioned earlier?…
i not a minister lah, & got minister shake legs & open legs at backlanes? converting currencies to millions isn’t the same as being paid millions upfront without conversion.
i not expecting any change overnight, but PAP has been in power for decades.
if, as you say people who believe MW will work is jumping to conclusions. then what of ERP to control traffic, bringing in hordes of immigrants to maintain GDP figures & letting PRs & foreign workers rent HDB units or rooms?
got any prove the above measures work? such policies are ministerial standards? at ministerial level, they just bulldoze their way to please themselves, they din want to listen to the ground. GE 2011 saw FA Minister being voted out, the consequences of having lousy teammates? your teammates make mistakes, but you pay for it. we still here cos problems still here…
mice is nice
ok ok..cool down .
between our conversation here,if the word recession come from me first,I will sit down and shut up now.
Everyone is entitle to his opinion and there is no right or wrong.My view may be naive ,and I never claim I am right.Discussion only mah.Looks like my expression in English is not good enough.
Forget about those existing ineffective policies and those people.OK,I join you,high handed,money face,cho bo tai chi.Hylum one oso got.U want?Yio chee bak kim kim,tho karng bo yong thim…You want somemore?….I got many more to describe them than you.BUT……
Lets focus on MW here .Maybe you can enighten me how MW can help.You may be right .I know you have many good idea.I am learning,care to share?
agongkia,
its time to face issues head-on. no ducking issues.
the critics of MW are in the end building their case on paper why it will not work. arguing on paper will never solve issues, S’pore’s isn’t what she is today because leaders back then succeeded in convincing critics on paper.
being perfect on paper doesn’t translate to success in reality.
you dun need me to enlighten you, there’s a number of articles on MW in TOC with countless posts. take your time to read them.
Gordon doesn’t give enough credit to the first diagram. Look at the “difficulties” of getting new PAP candidates in recent elections – super high ministerial wages so diagram 1 correctly shows that less people will be available to serve under PAP banner.
@agongkia, 26 May 2011
“…MW will only make me more lazy,less productive and distort the market.I will only support if I am simple minded….”
agongkia is spot on in that logic and reasoning. Again we have to look at our situation/experience, not just theories. Again look at the ministers’ high pay & recent days official explaining about how & why it came about: LAZY = letting MKS escape, using labor injection to boost GDP, etc…, LESS PRODUCTIVITY = what has ‘faster. better, cheaper’ done besides good laugh in Zorro suit; DISTORT MARKET = last minister says enough HDB flats, next minister say not enough rental flats/more BTOs to be build AHEAD of time; one says $8 can get a by-pass surgery, etc….. Spot on again about being simple minded. BTW, are you Dr LWK? – your logic looks familiarly hilarious.
mice is nice,
Part 2 MW started .can continue over there,this one going archive…