Another take on the minimum wage and minimum income debate
Damion Crawford, GUEST COLUMNIST
During the recent parliamentary debate on the minimum wage, I made a point about the separation of minimum wage and minimum income. I would like to use this column to expound on that position and possibly start a well-needed debate on the topic.
Any reasonable discussion about minimum wage, like all labour issues, has two sides to the coin. They are usually as follows:
1) The impact on the employee.
2) The impact on the employer.
IMPACT ON EMPLOYEE
The level of the minimum wage is often argued to be too low to allow a reasonable living standard for the employed. I repeat MP Horace Dalley's recent point made in Parliament that the minimum wage is indeed necessary as the Government seeks to set a protective floor against worker exploitation, especially in an economy with a large labour surplus.
The minimum wage, however, must be informed by the income needed to ensure a minimum living standard for an employed individual. I make this clarification because there should be a difference between the acceptable minimum living standard (AMLS) of a person contributing to the productive process (the employed) and a non-contributor to the productive process (unemployed).
To this extent, the income necessary for the AMLS of an employed man may be $7,000, while the income necessary for the unemployed AMLS may be $3,000. This position of employed versus unemployed AMLS is important to ensure the consistent motivation for an individual to seek employment more so than to live only on welfare. To this extent, a conversation must be had on both the minimum wage and the minimum welfare level. It is the former that I will seek to expound on here.
IMPACT ON EMPLOYER
Our problems would have been solved quite easily if the AMLS (worker impact) was the only consideration in setting the minimum wage. However, the impact an increase in minimum wage will have on the employer and, by extension, economic activity, also needs to be considered.
We often underestimate the impact of an increase in minimum wages on an organisation, assuming that the total impact is equal to the number of minimum-wage workers multiplied by the increase in minimum wage. As an example, the flawed assumption is that a company with five workers of which only one is being paid minimum wage - if minimum wage increases by $500 a week - the impact would be $500 per week.
This suggests a non-appreciation of the organisational behavioural concept called 'equity theory', which argues that workers at differing levels seek to maintain an equity gap between themselves and other workers at other levels.
To use the simplified example above of a company with five workers, of which one is a minimum-wage earner and is granted a $500 increase, this could cause a weekly $2,500 increase in the wage bill based on the workers' desire to maintain their equity gap.
Let's assume, for the example above, that new workers are paid a minimum wage of $5,000, while established workers receive a $500 premium, thus receiving $5,500. If, as stated above, the minimum wage increased by $500, the established workers would then desire, or even demand, a new salary of $6,000.
In the aforementioned example of five workers, this equates to a wage bill increase of $130,000 per year. For 50 workers, that would mean a work bill impact of $1.3 million.
Another major concern cited regarding the increase in minimum wage is the impact on 'non-profitable employment'. This is employment not meant for the creation of marketable output. Examples of these are household helpers, gardeners, etc. The assumption is that increases in minimum wage may lead to a reduction in employment, especially in this category.
WAGE VS INCOME
For the purpose of this column, wage is the amount of money one receives in return for work, while income is the amount of money one has access to. Therefore, the minimum wage is the minimum amount of money a person should be paid by his employer, while the minimum income is the amount of money to which the individual will have access. Therefore, a person 100 per cent dependent on welfare will have an income, but no wage. In addition, a person whose wages aren't supplemented in any way has a scenario where wage equals income.
The proposal is as follows:
1) That we form a committee to establish the AMLS both for the employed and the unemployed, with the former being used to educate the minimum wage debate and the latter being used to educate the welfare debate.
2) That we establish a minimum wage, as well as a minimum income. Therefore, minimum wage can be $5,000, while minimum income can be $7,000. (This can be educated by the AMLS study).
3) That we establish a minimum income fund which will get its contribution from a two per cent corporate tax.
If this is established based on accepted variables in the future, the Government can decide to move minimum wage and/or minimum income based on the realities faced. An example of how this would work is as follows:
If minimum wage is set at $5,000 and the minimum income $7,000, the person being paid $5,000 will collect $2,000 from the AMLS fund. If the person is being paid $6,000, they will collect $1,000 from the AMLS fund.
1. This process will cause the cost to be post-profit, therefore not being deleterious to small businesses or businesses operating on the fringe (i.e., breaking even, operating at a loss, close to breaking even).
2. The process will have less of an impact on 'non-profitable employment'.
3. Government has the flexibility to adjust one or both variables dependent on the realities being faced.
4. Workers' living standard can be improved.
1) Companies that have workers below the minimum income will be subject to random audits.
2) Employees must be signed on by the employers with an application process for which they have to qualify. If they are not qualified, the company has to pay the minimum income and not the minimum wage. If they do qualify, they can pay the workers the minimum wage and the fund will act as a subsidy to meet the minimum income standard.
3) Government should establish job categories that can't be considered for minimum-wage payments, to prevent a flood of applications for jobs that, by natural design, demand a higher wage than the minimum wage or income.
1. Businesses will resist an increase in profit tax. However, they also resist an increase in minimum wage, so the result is neutral.
2. High sanctions must be put in place to reduce the urge to beat the system.
3. Administration may be an issue, however, one solution may be for the employer to pay and then claim from the fund instead of the making all the individual cheques.
Damion Crawford is junior minister of tourism and entertainment and MP for East Rural St Andrew. Email feedback to email@example.com.