By Professor Tommy Koh: Thoughts Turn To The Workers In May
May 14, 2019
The first of May is celebrated in most countries in the world as the International Workers’ Day or simply May Day. It is a national public holiday. In this month of May, to honour the workers of the world, I felt inspired to study and recap the history of the minimum wage. My purpose is to give an objective account of the pros and cons of the minimum wage.
The minimum wage is the minimum amount of remuneration which an employer is required to pay his workers, for the work performed during a given period. The minimum wage can be an hourly, weekly or monthly wage. It cannot be reduced by collective agreement or individual contract.
The minimum wage has four objectives. First, to protect workers against unduly low pry. Second, to ensure a just and equitable share of economic progress. Third, to provide a minimum living wage to all who are employed and who need such protection. Fourth, to overcome poverty and to reduce inequality.
The demand for a minimum wage began in the 19th century, as a way to stop the exploitation of workers in sweatshops, by employers who enjoyed an unfair bargaining power over the workers.
The first country to adopt the minimum wage was New Zealand, in 1894. Australia followed two years later, in 1896. The United Kingdom adopted it in 1909 and the United States in 1938. The last country to do so, in 2015, was Germany.
However, not all egalitarian societies have a minimum wage law. The following egalitarian countries do not have a minimum wage: Austria, Denmark, Finland, Italy, Sweden and Switzerland. They rely on collective bargaining, between trade unions and employers, to set minimum wages for the workers.
The minimum wage may be a living wage or a poverty wage, depending on the amount of the minimum wage. There are very big differences in the amounts of the minimum wage, established by the developed countries, belonging to the Organisation for Cooperation and Economic Development (OECD).
The highest hourly minimum wage is in Australia, fixed at US$15.60. The lowest is in Mexico, fixed at US$0.60. The hourly minimum wage in the US is US$7.25.
Many American workers contend that earning the minimum wage still leave them in poverty. The lesson learnt is that a minimum wage can be a living wage or a poverty wage, depending on the level at which it is set.
Arguments For And Against
There is no consensus on the merit of a minimum wage. Those who oppose the minimum wage have argued that it:
(a) is not effective in alleviating poverty;
(b) hurts small business;
(c) reduces the demand for workers;
(d) benefits some workers at the expense of the poorest and least productive;
(e) encourages employers to replace low-skilled workers with technology;
(f) results in higher long-term unemployment; and
(g) results in higher prices for consumers.
Minimum Wage and Unemployment
A powerful argument often mounted against the minimum wage is that it causes unemployment or under-employment. What is the evidence on this argument?
In 2006, the International Labour Organisation (ILO) published a paper stating that it had found no evidence of a link between minimum wage and unemployment in countries which have suffered job losses.
In the case of Germany, which only adopted the minimum wage in 2015, it was found that the feared increase in unemployment, did not materialise. As a result, the Deutsche Bundesbank (German Central Bank), revised its opinion and stated in its monthly report of August 2015,
that, “the impact of the introduction of the minimum wage on the total volume of work appears to be very limited in the present business cycle.”
My conclusion is that there is no empirical evidence to support the argument that minimum wage causes unemployment or under-employment.
No Consensus Among Economists
There is no consensus among professional economists on the merit of the minimum wage.
Several surveys have been conducted in America, with members of the American Economic Association (AEA). In a survey conducted, in 2006, by Robert Whaples, with members of the AEA, it was found that 47 percent wanted the minimum wage abolished, 38 percent wanted it increased, 14 percent wanted to keep it at the current level and 1 percent wanted it decreased.
I suspect that the economists in Singapore would be just as divided as those in America.
ILO And Minimum Wage
The International Labour Organization (ILO) is the United Nations institution which looks after the interests of workers. Singapore is a member of ILO.
What is the position of the ILO on minimum wage? ILO is in favour of the minimum wage. It has two conventions on the minimum wage.
The ILO Convention No. 26 (1928), called the Minimum Wage Fixing Machinery Convention, has been ratified by more than 100 countries.
It encourages countries to implement minimum wage where, “no arrangements exist for effective regulation of wages by collective agreement or otherwise and wages are exceptionally low.” Singapore is not a party to this convention.
Another convention is the ILO Convention No. 131 (1970). Also called the Minimum Wage Fixing Convention, it has only 52 parties. Singapore is not one of them.
The purpose of the convention is to help members on how to fix the minimum wage.
According to the ILO, 87 percent of its members have adopted the minimum wage and the remaining 13 percent have not. As I have pointed out earlier, some of the most egalitarian countries in the world, such as, Denmark, Finland, Sweden and Switzerland, do not have a minimum wage. Contrariwise, some of the most unequal countries in the world, such as the United States, do have the minimum wage.
What conclusions can we draw from this brief history of the minimum wage?
First, I think that in the 19th century and the first half of the 20th century, the minimum wage played an important role in protecting the workers from exploitation by their employers.
During this period, trade unions were weak and few countries had an effective system of collective bargaining between workers and their employers.
Second, the minimum wage is not a guarantee that the workers will earn a living wage. In many countries, the minimum wages are set so low, that the workers earning the minimum wages, still live in poverty. On the other hand, we have seen examples of egalitarian countries which do not have a minimum wage.
Third, in the case of Singapore, the government has decided not to adopt a minimum wage. Instead, it has adopted the Workfare income supplement and Progressive Wage Model.
I am indifferent to the means employed to ensure that our workers are able to earn a living wage. The current situation, however, is sub-optional.
Our median monthly income among full-time employed residents is $4,437. The international best practice is to draw the poverty line at 50 percent of the median income, which is, about $2,200.
Yet hundreds of thousands of our workers earn incomes below the poverty line, even with Workfare and the Progressive Wage Model. According to the SMU publication, A Handbook on Inequality, Poverty and Unmet Social Needs in Singapore, “around 20 to 35 percent of households live in relative poverty.”
I hope that Singapore will work harder at reducing inequality and raising the wages of workers at the lower end of our social pyramid.