Fake Minimum Wage

An arguable article  take from The Malaysian Insider (http://www.themalaysianinsider.com/malaysia/article/pr-bns-minimum-wage-almost-no-change-at-all/ ) :

“KUALA LUMPUR, Oct 4 — The ruling Barisan Nasional (BN) coalition’s minimum wage policy brings about “almost no change at all”, the federal opposition Pakatan Rakyat (PR) said today.

“The announced minimum wage rate of RM900 for the peninsula and RM800 for Sabah and Sarawak is actually inclusive of allowances, which effectively means the basic wage is still between RM700 and RM800,” PR said in a statement signed by PKR’s Chua Tian Chang, the DAP’s Liew Chin Tong and PAS’s Dr Dzulkefly Ahmad.

“This means the purported changes were almost no change at all,” they said, claiming that a study by the Human Resources Ministry showed a third of the workforce currently earn around RM700 each month.

PR asked BN Youth chief Khairy Jamaluddin (picture)to join the federal opposition coalition in demanding that the government “declassify” a confidential World Bank report titled “Optimal Design for a Minimum Wage Policy in Malaysia” dated July 28, 2011.

PR also said that talk that “an additional RM200 in minimum wage would bankrupt companies is simply untrue.”

Yesterday, Khairy had attacked PR’s proposal to set the minimum wage at RM1,100, arguing that higher floor wages will cause companies to go bankrupt.

But Chua said at a press conference today: “The problem is not minimum wage per se, the problem is actually the lack of support services.

“Although we maintain that RM1,100 is viable for majority of enterprises, unfortunately the smaller enterprises are not sufficiently protected and the government has not given them enough support for them to sustain even RM700.”

PR said this shows that the minimum wage policy “must not be implemented in isolation and in a piecemeal manner”.

It added that the pact had proposed to cut down reliance on foreign labour and human labour, as well as increase female participation in the workforce.”

            Here we are talking about price floor that are applied to a labor market, or otherwise called minimum wage. A minimum wage enforced at a level that is higher than the equilibrium wage leads to a high rate of unemployment. Based on the article, Barisan Nasional announced that the minimum wage will be increased to RM900 for the peninsular and RM800 for Sabar and Sarawak but this figures are inclusive of allowances. This means that the basic wage is still lower than RM900. Lets compare this in a graph.

                  The above graph represents the minimum wage rate that is given to labors without the addition of allowances given to labors.  W1 represents the minimum wage that is imposed by the government excluding the allowances. W2 represents the wage rates that is supplied to the labor when allowances are added with the minimum wage imposed.

               

             So, when government announces that minimum wage is increased inclusive of allowances, basically it doesn’t make any effects to the labors. The wage rate received by the labors are basically the same. As we can see that the minimum wage is implied above the equilibrium level the quantity demanded supplied for labor exceeds the quantitiy demanded. Therefore, this occurs a surplus of labor. The surplus of labor is the labors that are unemployed. This also remains the same when the government announce that minimum wage in increased but there is also subsidy cuts in the petroleum or any normal goods in the market. It will also give very little effect to employees.

            When we look at the labor market, supply curve also measures the marginal social cost of labor while the demand measures the marginal social benefit from labor. Such labor market that is not imposed by a minimum wage distributes the economy’s limited labor resources to the jobs in which they are valued most efficiently.

             When quantity of labor employed is lower than the efficient quantity, there is a deadweight loss. Some workers would like to work at the competitive market wage but cannot, and the companies that would be happy to employ them at that wage are unable to. The potential benefits from employment that go unrealized are deadweight losses.

            There is usually an inversely connection between the demand for labor and the wage rate that a business needs to pay for each extra worker hired. If the wage rate is high in a market, it is more expensive to hire extra employees. When wages payed are lower, labour becomes fairly cheaper than for example using capital equipment and it becomes more cost-effective for the business to take on more employees. There is also a comment stated that by increasing the wage rate in a country, it will create more high school dropouts because teenagers prefer to work than study.

            Furthermore, if there isn’t any minimum wage imposed by the government, labors and employees will continue to work until the quantity supplied of labor is equals to quantity demanded. Therefore, reaching the equilibrium level. Minimum wage acts as an artificial price floor on labor.

            Some advantages of minimum wage are it motivates workers to work harder and more efficient. It also increases the standart of living for the poorest people who work in farms or the undeveloped places. As the price of labour increases, technological development will also increase because this may encourage business efficiency at a constant rate.  Next, it also removes away the low paying jobs, forces the to train for and strive for a better paying jobs.

            

            Disadvantages of minimum wage is that it affects the small to medium size business more than it affects the large business. It reduces the quantity demanded of workers by drastic lessening in the number of hours worked by employees or through the lessen number of jobs offered to the people.

          

              The main argue here is the fairness of the minimum wage that is imposed by the government. This depends on the demography. "The 900 ringgit level is too high for those in small towns and remote villages," said Shamsuddin Bardan director of the Malaysian Employers' Federation. The situation is better managed if the minimum wage rate is connected to how the labors work and the productivity of the labors. This will be fairly a better way to pay them. This will also be unfair because firms are willing to hire more workers and people are also willing to work but they are not allowed by the minimum wage that is imposed. This blocks voluntary exchange in the market. Some alternative beside imposing a minimum wage rate are providing the workers with a basic income.