Who’s afraid of minimum wages?


A recent decision by the tech giant Amazon to ensure that workers are at least paid a minimum wage of US$ 15/hour – which is almost twice the US Federal minimum wage of US$ 7.25 an hour  – has renewed attention on the role that minimum wages can play in influencing labour market outcomes. Critics might argue that this portends potentially adverse consequences because Econ 101 says that minimum wages cause unemployment or at least restrict employment opportunities.

Is that really the case or does Amazon know something that avid followers of Econ 101 do not?  Amazon’s position is supported by an evaluation by the European Commission (EC) of 14 OECD countries which makes the following optimistic assessment:

The evidence suggests that a well-managed minimum wage policy through statutory minimum rates or collectively bargained wage floors can be effective at improving the wages of low paid workers without negative effects on employment rates.

What about emerging economies? Consider Table 1 which provides comparative on a sample of emerging economies.

Table 1

Country Minimum wage/Average wage Employment rate
South Africa 0.3 0.43
China 0.33 0.69
India 0.4 0.5
Indonesia 0.69 0.63
Philippines 0.87 0.59
Thailand 0.65 0.71
Poland 0.4 0.5
Russia 0.18 0.65
Turkey 0.38 0.46
Argentina 0.59 0.56
Brazil 0.45 0.59
Chile 0.45 0.56
Colombia 0.6 0.63
Mexico 0.28 0.57
Average 0.47 0.58

Source: Derived from Stijn Broecke, Alessia Forti & Marieke Vandeweyer (2017) ‘The effect of minimum wages on employment in emerging economies: a survey and meta-analysis’, Oxford Development Studies, 45:3, 366-391

A cursory examination of Table 1 suggests that it is possible to have high minimum wages that co-exist with above-average employment rates (that is, above the sample average of 58%), the cases of Colombia, Indonesia and Thailand being most notable in this regard. A more rigorous meta-analysis for the aforementioned sample of emerging economies arrives at the following conclusion.

… minimum wages have had little detectable impact on employment. While more vulnerable groups appear to be more adversely affected by minimum wage rises, the effects tend to be small on average. These findings are very much in line with the growing consensus around the impact of minimum wages on employment in more advanced economies…

The study also points out that many empirical investigations in this field suffer from a ‘negative reporting bias’, that is, there is a tendency to report negative results (minimum wages reduce employment). At least 70% of the estimates that were reviewed were actually statistically insignificant. The mean value of the ‘elasticity’ derived from 746 estimates is 0.047, that is, a 10% increase in the minimum wage might reduce aggregate employment by, at best, 4.7%.

It is worth noting that the results of this meta-analysis are in line with the findings of World Development Report 2013 which pointed out that ‘…most estimates of the impacts of (labour regulations) on employment levels tend to be insignificant or modest’ (WDR, 2013: 261). Even if there is a modest and negative impact of minimum wages on employment, this can be offset by the possibility that minimum wages can alleviate the incidence of low pay and thus reduce working poverty.

Of course, minimum wage policy needs to be combined with complementary measures, such as education and skills policies, active labour market programmes and social protection measures in general, to tackle the problem of low wage employment. Nevertheless, the EC evaluation, combined with the aforementioned meta-analysis of the minimum wage-employment nexus are highly relevant to the case of low and middle-income economies that are typically characterised by a significant incidence of low pay and working poverty. A reduction in working poverty, while desirable in itself, can also boost aggregate demand by enlarging the size of the domestic market and become a new source of job creation.

One could still argue that minimum wages, in general, are problematic for developing countries that rely heavily on foreign direct investment (FDI). High minimum wages might deter FDI which usually is motivated – so goes the argument – by the incentive to locate in low-wage labour markets. The problem with this line of reasoning is that it is incompatible with the predominant finding in the academic literature that FDI creates a ‘wage premium’, that is, affiliates of multinational companies pay significantly higher wages than their domestic counterparts while boosting both employment and productivity. Thus, it is unlikely that foreign firms would be deterred by minimum wage legislation.



Facebook and global poverty reduction: ‘the road to hell is paved with good intentions’

In 2013, Facebook launched an initiative to enhance internet access in developing countries. In 2015, at a UN Summit, Mark Zuckerberg, the CEO of Facebook, argued passionately that connecting poor people in the developing world to the internet is crucial for the success of the global goal to eliminate extreme poverty. Today, this initiative is known as ‘Free Basics by Facebook’. The goal is to bring ‘internet access and the benefits of connectivity to the portion of the world that doesn‘t have them…. Free Basics by Facebook provides people with access to useful services on their mobile phones in markets where internet access may be less affordable. The websites are available for free without data charges, and include content on things like news, employment, health, education and local information. By introducing people to the benefits of the internet through these websites, we hope to bring more people online and help improve their lives’.

Not surprisingly, Facebook is also available free for mobile phone users of this scheme. Facebook makes strong claims about the impact of such a benevolent mission. Thus:

‘Through our connectivity efforts we’ve brought more than 100 million people online who otherwise would not be and introduced them to the incredible value of the internet. They’re doing better in school, building new businesses, and learning how to stay healthy’.

Some anecdotal examples are given to support this claim, but a more rigorous evaluation is needed. As critics have been quick to point out, this feel-good and benevolent mission can turn out to be self-serving as the ‘free basics’ scheme is a conduit for increasing the size of Facebook’s market in the developing world. Furthermore, subscribers to the ‘free basics service’ could easily end up conflating the internet with Facebook. It is also naïve to reduce a complex phenomenon – poverty and its multidimensional nature – into an issue of enhancing access to the internet.

Perhaps Facebook’s biggest moral dilemma is to contend with increasing evidence that it has unwittingly ended up as an instrument for either abetting authoritarian regimes (as in the Philippines) or fomenting social violence (as in Myanmar, Sri Lanka, India and Libya). It has also been held responsible for mobilizing groups to commit violence against immigrants (as in Germany). In some cases, governments (notably Sri Lanka and Libya) have been forced to temporarily shut down Facebook.

Mark Zuckerberg’s benevolent mission to join forces with the UN and others to fight extreme poverty across the globe has been dented by recent events. Facebook has responded with countervailing measures, but self-regulation by a global corporate behemoth is not adequate enough to respond to a growing and disturbing phenomenon of perpetrators in different parts of the world who have used Facebook as a way of ‘connecting hate’.

India as a case of the ‘Billionaire Raj’

The 2018 World Inequality Report classifies India as part of the ‘extreme inequality frontier’. James Crabtree, former Mumbai Bureau Chief for the Financial Times, and currently holding a professorial position at the National  University of Singapore, has revisited the theme of India’s extreme inequality by offering a riveting account of the ‘Billionaire Raj’.

Read more at Griffith Asia Insights…..

Life expectancy in rich countries

In the latest issue of the British Medical Journal, Jessica Ho and Arun Hendi chart recent trends in life expectancy in 18 rich countries. The authors rightly note that ‘life expectancy is a key summary measure of the health and wellbeing of a population’. Not surprisingly, the UNDP’s iconic ‘human development index’ (HDI) incorporates life expectancy as one of its core components alongside per capita income and education.

While ‘monumental improvements in life expectancy have been the predominant trend for high income, developed countries over the course of the 20th and 21st centuries’, recent changes have been mixed and in some cases, most notably the United States, the evidence on the evolution of life expectancy has been quite disturbing. Ho and Hendi show that in 12 out of 18 countries, life expectancy declined moderately in 2014-2015, although this has been offset by robust gains. The exceptions have been the United Kingdom and the United States which appear to be ‘experiencing stagnating or continuing declines in life expectancy, raising questions about future trends in these countries.’  As far as the US is concerned, these trends reinforce its poor position in an international ranking of life expectancy among high-income countries (see table 1 below).

Table 1

Country Life expectancy in years (average for men and women)/2015
1.       Japan 84
2.      Switzerland 83
3.      Spain 82.7
4.      Australia 82.7
5.      Italy 82.3
6.      Norway 82.3
7.      Sweden 82.2
8.      France 82.2
9.      Canada 82.0
10.   Netherlands 81.5
11.    Finland 81.4
12.   Austria 81.2
13.   Portugal 81.1
14.   United Kingdom 80.9
15.   Belgium 80.9
16.   Denmark 80.7
17  Germany 80.7
18.   United States 78.9

Source: Ho and Hendi (op.cit)

The recent mixed trends in life expectancy can be linked to deaths due to diseases associated with old age, such as respiratory and cardiovascular disease. In the US, a much-noted study by Nobel laureate Angus Deaton and his co-author Anne Case draws attention to the hitherto unknown case of white non-Hispanic Americans with limited education (no more than a high school degree) experiencing significant ‘increases in mortality and morbidity in mid-life since the turn of the century’. Proximate causes that could explain these negative trends include drug overdoses (often known as the ‘opioid crisis’), suicides and alcohol-related liver mortality – the so-called ‘deaths of despair’. Deeper structural factors include various types of social and economic dysfunction, such as the decline of marriage, social isolation and limited labour market opportunities. Case and Deaton lament that the story that they unearth is a tragic one ‘about the collapse of the white, high school educated, working class, after its heyday in the early 1970s…’ which continues unabated.



Living the American dream….from pay check to pay check

Is the US economy poised to enter a new era of shared prosperity? Is the American dream becoming a real prospect again for the average worker? And that too at a time when the US administration is conspicuously dysfunctional under a Trump Presidency?

Some indicators suggest considerable grounds for optimism about future economic prospects in the United States. The unemployment rate (at 4 per cent) is at its lowest level in decades. Growth has surged to more than 4 per cent in the most recent quarter.

Critics are not convinced. Nobel Laureate Paul Krugman dismissed the growth data as a temporary blip. He argues that one would need at least a decade of 4 per cent plus growth before an era of sustainable economic boom can be proclaimed.

Robert Reich, former Labour Secretary under the Clinton Administration and a distinguished Professor at Berkeley, draws on a survey reported in CNBC to highlight the fact that almost 80 per cent of Americans live from paycheck to paycheck. The same survey shows that the majority of Americans battle with the unsustainable burden of personal debt. These grim statistics can be combined with protracted wage stagnation, especially for low skilled workers, and what some leading analysts have called US-style ‘extreme inequality’. Reich makes the point that while jobs are plentiful, ‘good jobs’ entailing decent wages and secure working conditions, are scarce.

How can one explain these stylized facts that seem to be stubbornly persistent even as the labour market tightens in the context of an incipient boom? Reich highlights two aspects of the American labour market that are germane to our understanding of what is happening to the living standards of the average American worker. To start with, there has been a substantial erosion of the bargaining power of workers. In 1954, unionization rates were 35 per cent of the work-force. In 2015, it stood at a paltry 11 per cent. Reinforcing this loss of bargaining power is the rise of oligopolistic market power across a broad spectrum of American industries.

Reich is not the only one concerned about these stark structural realities of the American labour market. Other scholars have enunciated a similar narrative. Such scholarship suggests that reviving the American dream will require much more than a temporary surge in growth and low unemployment rates.