Blog

Living wage vs minimum wage: Mind the gap

The notion of minimum wage has been around a long time, but it does not necessarily coincide with the notion of a ‘living wage’. As I have argued elsewhere, even in rich countries the mandated minimum wage does not provide workers and their families enough to meet their basic material needs. Not surprisingly, this has bred the phenomenon of ‘working poverty’, that is, the incidence of poverty that prevails among those who are still employed. For example, in the United States, the incidence of working poverty is 6.6 cent, while in Canada it is 5.5 per cent. In general, between to 5 to 7 per cent of the employed population are afflicted by working poverty in rich countries, requiring the state to intervene through various forms of means-tested financial assistance to such vulnerable groups. Working poverty is, of course, significantly higher in the developing world. Even in such a reasonably prosperous and middle income country like Malaysia, the incidence of working poverty is nearly 37 per cent.  

It thus appears that the time-honoured tradition of using minimum wages as a way of warding off working poverty has not been particularly effective. One could argue that this is a case of improving compliance and enforcement rather than a radical adjustment of the prevailing minimum wage to bring it up to to the standard of a ‘living wage’. Yet, systematic compilation of the available evidence by such bodies as the Living Wage Foundation in the UK has shown that the gap between a national minimum wage and estimates of a national living wage has actually grown between 2011 and 2015.

Such evidence lies behind the impetus of a ‘living wage movement’ in rich countries. Civic activism of this kind has also grown in the developing world. A good example is the ‘Asia Floor Wage Alliance’ (AFWA) which describes itself as

….an international alliance of trade unions and labour rights activist who are working together to demand garment workers are paid a living wage. It began in 2005 when trade unions and labour rights activists from across Asia came together to agree a strategy for improving the lives of garment workers.

As part of its objective of ‘improving the lives of garment workers’, AFWA provides (PPP-based) estimates of living wages in the garment industry across different parts of Asia. Based on such evidence, the prevailing minimum wage in some Asian countries is pitifully low varying between 19 per cent  (Bangladesh and Sri Lanka) and 54 per cent of the estimated living wage (Malaysia).  Clearly, if these estimates are to be believed, the minimum wage, even if adequately enforced, will not be able to deal with the scourge of working poverty in Asia.

 

 

 

When full employment is not enough

The unemployment rate in the UK is now one of the lowest (4.6 %) since the early 1970s. Even during the global boom of the mid -2000s, one did not witness such low rates of unemployment.

One could argue that the UK is experiencing full employment. Yet, when one looks at living standards from the perspective of real wages, a rather different – and disturbing – picture emerges. Real wages today are lower than they were in 2007. So, the average Briton is now poorer than she/he was ten years ago. Hence, a low unemployment rate does not signify full employment in a meaningful sense. Any job is not necessarily better than no job. What one needs are plentiful supply of good jobs that are productive and pays enough to escape poverty and meet ones material needs. Hence, as far back as 1964, the ILO adopted the convention (C.122) that ‘…each Member (state) shall declare and pursue, as a major goal, an active policy designed to promote full, productive and freely chosen employment.’

The Grenfell tragedy and the perils of deregulation

The devastating fire that engulfed the high-rise housing estate of Grenfell Tower in London and claimed 79 claims emerged from a toxic combination of bad policies and poor govenance. One of the culprits appear to be the proclivity to pursue a deregulatory agenda in the mistaken belief that reducing the regulatory burden on business would unleash private sector growth and economic prosperity. Instead, what it does is inflate profits by reducing compliance costs. These profits do not necessarily translate into better jobs and greater prosperity for all.

The UK government embraced the so-called ‘one in, three out’ approach with respect to regulation. In other words, every piece of new regulation can only be accommodated if three existing ones are eliminated. Thus, as a New York Times editorial points out:

“…a British law first passed in 2011 … requires the elimination of regulations as each new one is enacted. At first, one rule had to be ended for every new rule passed. That was later expanded to “one in, two out,” ….In 2015, British law became “one in, three out.”

The editorial argues that this diluted basic safety standards (such as lack of sprinklers in a high rise housing estate that was built in 1974) that enabled the Grenfell tragedy. Other countries, and especially those in the developing world, should pay heed to the perils of deregulation.

Why free markets need equality

The conventional (and conservative) wisdom is that free markets needs inequality to create incentives for ‘wealth creators’. Chris Dillow, one of my favourite bloggers, argues instead that free markets need equality. As he puts it:

 

If you are serious about wanting free markets you must put in place the conditions which are necessary for them – namely, greater bargaining power for tenants, customers and workers. This requires not just strong anti-monopoly policies but also policies such as a high citizens income, full employment and mass house-building.

In short, free markets require  egalitarian policies. Free marketeers who don’t support these are not the friends of freedom at all, but are merely shills for exploiters.

(21 June, 2017)

 

 

Fiscal consolidation in Armenia

I was recently invited by ILO, Moscow and the Ministry of Labour and Social Affairs of the Armenian government to present my report on macroeconomic policy, growth and employment. I focused on the growth and employment consequences of fiscal consolidation in Armenia.  The report – which was very well received by local stakeholders when it was presented at a workshop in Yerevan, Armenia (26 May, 2017) – will be released soon through ILO, Moscow and will be available in three languages – English, Armenian, Russian. A brief account is available in the following link:

https://blogs.griffith.edu.au/asiainsights/fiscal-consolidation-an-armenian-case-study/