Minimum wage as a poverty reduction policy tool


Sunday, January 12, 2014    

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THE new national minimum wage of $5,600 per 40-hour workweek and $8,198.80 for security guards took effect last Monday and, unsurprisingly, it has again raised the spectre of possible job loss and the viability of some struggling firms.

Some even question whether the minimum wage should be a poverty reduction policy tool. I think they are wrong.

Commander George Overton, president of the Jamaica Society for Industrial Security and director of operations at The Guardsman Group, was reported in the media last week as saying that security companies were now faced with tough decisions and negotiations with the companies that use their services.

"There are groups who cannot do without it (security services) by law and those that can. And those who can will make the adjustment to cut the numbers and those who can't will be very hard in their negotiations," Overton said.

With respect to small businesses in other sectors, Professor Rosalea Hamilton of the Micro, Small and Medium-sized Enterprises Alliance said the external and internal contexts in which individual firms operate would determine how well they absorb the increase.

"Increase in wages will mean for some businesses they either have to lay off or they maybe have to put persons on part-time or they have to make other adjustments in order to absorb the higher costs so they can still be viable and competitive. So any higher costs to some small businesses will imply adjustments in order to survive. And that means strategies to improve revenues or strategies to cut cost," Professor Hamilton explained.

Debate about the likely impact of the increase is taking place in a national context of economic contraction; diminished purchasing power evidenced by reduced spending over Christmas; and other high fixed overheads for things like electricity and transportation. All businesses are under pressure to keep down costs.

Ahead of the new rates taking effect, my colleague Martin Henry (Sunday Gleaner, December 22) rubbished the idea of a national minimum wage as government policy.

He noted that governments around the world feel a pressing sense of obligation to protect the poor and the weakest workers with a social-democratic minimum wage, and often with other price controls. "The problem with price-fixing is that 'fair price' can only be determined by real market forces, which allow a free buyer and a free seller in a free market to negotiate a mutually acceptable transaction of sale," he argued.

But that's not the full story. The problem with this approach is that the labour market is not as free as Martin made out. Wage setting is invariably an unequal power relationship between employer and worker.

Workers with rare skills in high demand are in a better bargaining position than unskilled or low-skilled workers who are available in large numbers. For most workers in low-paying jobs that the minimum wage seeks to protect, there is no process to arrive at a 'fair' mutually agreeable wage.

The historical evidence is that 'free' labour markets leave some workers with wages and working conditions that affront common decency; and practically, their low spending power is often a drag on economic activity. Hence, a minimum was not for governments to interfere unreasonably in a private matter between employer and employee but to redress a situation that societies deemed unacceptable.

Admittedly, there are challenges in setting a minimum wage to avoid the unintended consequence of job loss or business failure. As a society, Jamaica has been at it for years, and the key stakeholders -- employers, workers and government -- have largely avoided the dire predictions that accompany almost every increase. We just need to be sensible about it.

Rising income inequality

Forced by snow and brutally cold weather to extend my Christmas and New Year break in New York, I have been reflecting on a similar debate in the United States about increasing the federal minimum wage; this, in a context of growing income inequality that President Barack Obama has called a "defining challenge of our time".

Liberal economists and progressive policy advocates have calculated that increasing the federal minimum wage from US$7.25 to $10.00 an hour would immediately lift five million Americans out of poverty.

Conservatives are opposed in principle and political practice. Some, like Glenn Hubbard, dean of Columbia Business School, say that if society is affronted by wages below the poverty line then the remedy should be paid for by society in the form of income tax credits. Individual businesses should not bear the cost of socially desirable outcomes.

Of course, the chances of a Republican-controlled Congress agreeing to such a proposal are slim to none, and "Slim is out of town", as the irrepressible boxing promoter Don King used to say about the chances of journeymen boxers faced with similar odds.

Interestingly, the US is observing the 50th anniversary of an "unconditional war on poverty" launched by President Lyndon B Johnson in his January 8, 1964 State of the Union address.

It has been widely asserted that one of the factors behind the war on poverty was Michael Harrington's book, The Other America.

The book challenged the conventional wisdom that the nation had become an overwhelmingly middle-class society as a result of post-war prosperity. Harrington reported that almost one-third of all Americans -- between 40 million and 50 million people -- lived "below those standards which we have been taught to regard as the decent minimum for food, housing, clothing and health".

Initially, Johnson achieved many of his 'Great Society' initiatives including measures to provide education, training and other opportunities for those left behind by the market. Another signature achievement was Medicare, which provided minimum health protections for the elderly.

Progressive politics did not last long. In a blog on Huffington Post last week, Peter Dreier, professor of politics and chair of the Urban and Environmental Policy Department at Occidental College, summed it up this way:

"Americans' optimistic and generous attitudes began to change in the 1970s, as conservative politicians and pundits began their assault on government regulations, taxes, and social programmes. That steady drumbeat of anti-government blame-the-victim invective contributed to public scepticism that anti-poverty policies can work."

Over the past decade, many Americans have experienced declining wages, and currently the US has the most extreme income inequality among industrialised countries and a poverty rate that "has persistently been two or three times higher than poverty rates in most European societies", Dreier wrote.

Some progressives see signs of hope in movements like the 'Occupy Wall Street', which calls attention to the unconscionable wealth of the top one per cent; widening protests by workers at two corporate giants -- Wal-Mart and McDonald's -- for a US$15.00 an hour minimum wage; and the election of Bill De Blasio as mayor of New York City, who has pledged to reverse inequality in America's largest metropolis.

Reversing the trends of the past two decades may not be on the cards in the short run. Also, increasing the minimum wage is not sufficient to lift people out of poverty anywhere. Pro-growth policies, investment in training and education are essential.

But policy-makers and opinion shapers should pay attention to a recent comment by Pope Francis, an increasingly important voice of this age: " long as the problems of the poor are not radically resolved by rejecting the absolute autonomy of markets and financial speculation and by attacking the structural causes of inequality, no solution will be found for the world's problems or, for that matter, to any problems."





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