Miminum wage important for economy: ILO study

February 6, 2004
Singapore Democrats

This post is at least a year old. Some of the links in this post may no longer work correctly.

Lee Chang-Hee
Industrial Relations Specialist
International Labour Organisation

Below are excerpts of a study recently conducted by the International Labour Organisation (ILO). The full report can be found at http://www.amrc.org.hk/4207.htm

Does a minimum wage policy protect workers who are under pressure in the race to the bottom of labour standards in a globalising world economy?

Virtually everywhere in the world, there is on-going debate on the usefulness of minimum wage regulation. Since structural adjustment programmes were introduced in the 1980s to many developing countries, minimum wage regulation has been under attack on several grounds: proponents of the structural adjustment programme argued that minimum wage regulation did not help the poorest of poor workers, i.e. those in the informal sector, as the regulation covered only formal sector workers; furthermore, if a minimum wage is set at an unreasonably high level, it would have a negative impact on employment and therefore make its overall effect on income distribution at best ambiguous.

Particularly, as the accelerating process of globalisation forces nation states to compete against each other to attract more foreign investment, minimum wage regulation is seen as a possible barrier to more investment.

What is minimum wage?

Before looking at the current debate on minimum wage policy, it is useful to have a brief look at the definition, aim, and history of minimum wage regulation. A minimum wage is a minimum level of payment established by law for work performed. Its purpose is to protect vulnerable low wage workers from exploitation. It is a time-based wage that usually applies to unskilled adults entering work for the first time.

As a minimum wage is established by a law, it is legally enforceable. The key purpose of a minimum wage system is social – to prevent labour exploitation and poverty. This means the minimum wage should provide sufficient purchasing power to enable a worker to have a basic standard of living.

The minimum wage may also have an economic objective – to motivate workers, enable them to enjoy the benefits of economic growth, and contribute to the economy. It is generally considered that minimum wage regulation was first developed in New Zealand (1896) followed by Australia (1899), and later Britain (1909).

As the main objective of minimum wage regulation was the elimination of sweating, that is the payment of exceptionally low wages, its application was usually restricted to a limited number of particularly low-paying sectors or to selected categories of workers, such as home-workers, women, children and indigenous workers judged to be particularly vulnerable.

Effects of minimum wage

Regarding the effect of minimum wage on poverty, ILO analysis found that for a constant level of GDP per capita and average wage in manufacturing, in one locality, a higher minimum wage is associated with a lower national level of poverty.

In sum, the research findings strongly support the idea that the minimum wage may bring positive results in poverty alleviation by improving the living conditions of workers and their families while having no negative results in terms of employment.

Also, no evidence indicated that the level of the minimum wage relative to the average wage affected the size of the informal economy in Latin America. The…argument against a minimum wage system in developing countries on the grounds of employment and poverty is not convincing.

Let us examine another important argument against minimum wage regulation which is often put forward in the context of globalisation and competitive edge.

Often it is alleged that a high minimum wage is responsible for weakening competitiveness of industries. But is it really true? Take the case of Thailand. At the peak of the Asian financial crisis in 1997 – 1998, there was a heated debate on the role of the minimum wage in Thailand.

One view argued that the minimum wage was one factor responsible for falling competitiveness of Thai industries which triggered the crisis. The ILO conducted research to investigate relations between wages and other economic variables.

The ILOs research revealed that it was not primarily the level of the minimum wage but other macroeconomic factors such as a fixed exchange rate and falling productivity of Thai industries which caused falling competitiveness, eventually leading to the economic crisis.

The role of trade unions

If minimum wages are too low the objective of poverty reduction will not be achieved. People will continue to work because they have no alternative but the result is a society of working poor.

Therefore, minimum wage determination is a delicate issue, which should be seen in a broader context of interplay between market forces and collective bargaining power at various levels of economies, not in isolation from other forces at work.

In this regard, the fact that minimum wage fixing through tripartite discussion – either negotiation or consultation – is common in many countries is important. This introduces an element of negotiation between government, workers, and employers in the wage setting process. Where there is good quality information and the parties genuinely desire a common-interest outcome, tripartite deliberation could offer a mutually beneficial compromise.

But trade unions and other parties to consultations in many developing countries face a number of problems. As illustrated above, in a number of countries where trade unions at the workplace have very weak bargaining power, national trade union centres tend to concentrate excessive effort on the minimum wage fixing process, unintentionally resulting in further weakening trade union organisations and collective bargaining in the workplace.

Another typical problem in least developed countries is that there is often no reliable data on economic variables to be taken into account for minimum wage fixing and adjustment. Even if there are economic data for it, trade unions often lack the capacity to analyse them and engage in meaningful joint discussions. Developing power and abilities of trade unions at both workplace and national levels is an urgent task in many countries.

Renewed calls for minimum wage

After years under attack for alleged negative effect on low-paid employment, the minimum wage regulation seems to be back in favour as a means of providing unskilled workers with decent living conditions.

Several factors are responsible for the renewed interest in the minimum wage as a tool of market policy. First, several studies in the 1990s showed that the minimum wage had little, if any, effect on creating unemployment.

Second, there is a new human rights approach that focuses on the right to have decent employment. In developing countries, policy makers are not only concerned with the impact of the minimum wage on employment, but also with its impact on the level of poverty.

However, trade unions in many Asian countries face an uphill battle to win a minimum wage system, as the globalisation process and mobility of capital put great downward pressures on working conditions and in particular on minimum wage systems. This is a battle for decent work for all working men and women, which will continue.