Fixing minimum wage: a twisted tale

Tags: Op-ed
Fixing minimum wage: a twisted tale
PAY LOAD: German chancellor Angela Merkel (C) stands between leader of the CSU Horst Seehofer (R) and head of SDP Sigmar Gabriel (L) after signing the coalition agreement on November 27 which would introduce a minimum wage system
This hasn’t been a good week for those who like textbook solutions to labour market problems. The new coalition government in Germany has decided to introduce a minimum wage for the first time. A debate rages in the US as to whether to increase their minimum wage, although Congressional Republicans look likely to nix any rise. Some pretty crass attempts by some US firms well known for paying lousy wages — including giving advice to poor staff on how much food to eat and arranging for better-off staff to donate food to colleagues — caused a storm, ignited predictably over social media.

Why should anyone in India care about this? Wage stagnation in the west and fears that the middle class there is being hollowed out can’t be ignored any more. Inevitably, fingers are being pointed at likely causes and imports from developing countries are high on the list of many western voters and politicians. Whether imports are to blame is irrelevant; unless the western wage problem is fixed, the threat remains to emerging market exports and the jobs they bring. These knock-on effects are a consequence of living in an increasingly globalised world.

Western wage stagnation has also poisoned already-charged debates over immigration. Along with Canada and the US, many European governments have tightened up visa rules and made getting citizenship and other legal protections harder for workers coming from abroad. This directly hits many aspiring Indians and their families.

Conventional wisdom among economists is that, while higher minimum wages can raise incomes of those who keep their jobs, they also create unemployment. Better, they argue, to let wages fall so that employers offer jobs to those willing to work at lower wages. On this view, there’s no getting around the fact that employers can’t pay staff more than their productivity.

Mind you, not every economist agrees. Over the years there have been fights over two issues. First, how much total employment falls when minimum wages are hiked, has been contested. Secondly, some reckon that higher wages trigger consumer spending and this benefit to the national economy should be taken into account. Still, opposition to minimum wages is the majority view.

What this to-and-fro overlooks is that low productivity levels limit how much firms can pay in the first place. Well, whose fault is that? If this question is asked at all, then typically governments and lazy workers are blamed. But that’s one sided. After all, it is managers who should be designing workplaces and motivating employees to attain higher levels of productivity. CEOs should be putting in place incentives for managers to find more and more ways to create value. This requires much more than the Anglo-Saxon method of management-by-targets hiring-and-firing mentality. Coaching staff, deepening understanding of customer needs, and not accepting the status quo, require perceptive, reflective management. Feeble managers have a lot to fear from minimum wage hikes.

While the debate may be skewed in the west, the Chinese have looked at the problem differently. After all, they have plenty of low paid workers too. Beijing has repeated jacked up minimum wages in the coastal provinces in recent years and partly motivated a desire to force firms to upgrade their production. This will force managers to change their skill sets — being able to run a sweatshop will become less and less important. Understanding customers who are willing to pay for improvements, devising and executing product and process improvements, and staying ahead of the bright ideas of rivals will increasingly be at a premium. It’s managers who need to change, not just government policies towards schools and indolent workers.

The Chinese initiative is worth following as it is on a large enough scale to have significant effects on employment totals, foreign direct investment decisions, and innovation. Even if fears of relocation of some production to Bangladesh, Cambodia, Vietnam and other low wage destinations are realised, Chinese officials are prepared to say “good riddance” to these low paying jobs. It will be interesting to see whether they’ll change their tune if unemployment rises in any growth downturn or recession.

None of this is to imply that one side has all the arguments in the debate over minimum wages. Rather, the role on managers and their responsibilities in perpetuating low pay have been overlooked. Perhaps, we’ve become so used to blaming governments for society’s ills to overlook the harm done by inaction by another group of influential decision-makers, namely managers and CEOs. No doubt some will retort that managers have strong incentives to bolster productivity. Well if incentives work, raising minimum wages will make them a lot sharper.

(The writer is a professor of international trade and economic development at University of St Gallen, Switzerland)

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