1.1 Introduction
The
concept of the minimum wage remains a resounding mantra for workers, policy
makers and even employers and it serves as a useful tool intended to achieve
certain labour market outcomes. Saget (2006)
defines the minimum wage as the minimum amount that must be paid to a
significant component of workers inorder to meet the needs of not only the workers but also their families,
while considering the social and economic context of the country.
1.1 Theoretical Background
According to the neo-classical theory, the imposition of a
minimum wage on a competitive labor market creates unemployment; either because some workers are displaced from
their jobs or because new workers enter the labor market hoping to find one of
the high-paying ,but scarce, jobs (Borjas, 2013). Borjas (2013)
further theorized that if the minimum wage is applied to a covered sector (for
example the formal sector), displaced workers might move to the uncovered
sector (informal sector); thus shifting labour supply and reducing the
uncovered sector’s wage. The theory further propounds that firms usually
respond to the fixing of the minimum
wage by reducing employment. since the minimim wage is usually set above the
market equilibrium wage.
Despite the aforementioned theoretical framework, Saget (
2014) stated that empirical evidence from nine (9) countries established that,in
68 percent of the cases, the minumum wage had no effect on employment. This is
because employers can adjust to these increases in labour cost imposed in the
firm by the imposition of the minimum wage. This result is buttressed by Borjas
(2013) who indicated that the cost of adusting labour downwards is usually
higher than the cost of hiring.
The question then is how do employers adjust to the increase
in cost as a consequence of the fixing of minimum wage? Eyraud & Saget (2005)
observed that an increase in the minimum wage could affect employment
instantenously; but usually there is a tendency for the effect to be delayed,
especially with small firms. Eyraud & Saget (2005) further stated that
small firms are typically hesitant to
layoff workers in response to a rise in production costs (due to increase in
minimum wage) since their productive capacity would suffer as a result.
Addtionally, an increase in labour cost could result in employers defering
the creation of new jobs or refraining from filling posts left vacant by workers going into
retirement. The overal effect of the minimum wage on employment is not
instantaneous but delayed due to cost considerations by the firm (Borjas, 2013;
Eyraud & Saget, 2005).
Another way. ,according to Eyraud & Saget (2005), is that
employers tend to manipulate the hours worked by either adjusting it updwards
or downwards; or alternatively by
changing shift or working days of employees as a substitute for
retrenchment of workers . The first scenario was observed in a case study in
Brazil where employers demanded longer working hours so as to make up for the increase in the minimum wage (Eyraud
& Saget, 2005; Lemos, 2003).
3.1 Traditional Time Series Estimation Method
Over
time there has been basically two methods of estimation of the minimum wage,
using labour supply and demand concept (Eyraud & Saget, 2005). The underlying
hypothesis for the traditional model is that the employment rate is a function
of the economic activity that determines the demand for labour, labour supply
and the minimum wage. Saget (2014) observed that
for a long period it was believed that a 10 percent rise in the minimum wage
would lower teenage employment by one percent before new estimations were
introduced. Eyraud & Saget (2005) and Brown, Gilroy, & Kohen (1982)
realized that , in the United States, a 10 per cent increase in the minimum
wage led to a reduction in adolescent employment by 1 to 3 per cent on average
over the period 1954-80. However in a study by Rama (1996) in Indonesia, a 10
per cent increase in the minimum wage was estimated to rather reduce urban wage
employment by less than a quarter of a percent.
These traditional time series measures as found out by Saget
(2014) and Eyraud & Saget (2005) were frought with some weaknessness
ranging from limitied exogenous factors in the estimation model; the
complication due to stationarity, endogeneity, seasonal variations and
insufficient dispersion in the minimum wage over time; as well as the lack of
sensitivity of the fluctuations in economic activities and the specification of
the econometric model.
3.2 New Time Series Method correcting for Non-stationarity and Seasonality
Of
recent, a newer technique meant to reduce the negative impact on the minimum
wage -employment model caused by seasonality and non-stationarity has been introduced.
Though the new methods analyzed the same kinds of data and used the same
estimation techniques as the old method, they are more precise in statistical
terms. Bernstein & Schmitt (1998) proved the effectiveness of this
method by using the same data and models used in the earlier studies. They
found out that effects on the employment rate that was previously attributed
to explanatory variables such as the minimum wage were largely accounted for by
seasonal variations and non-stationarity. The key finding of Bernstein & Schmitt (1998) was that a 10
per cent increase in the minimum wage is associated with no more than a 0.5 per
cent fall in the employment rate of adolescents, a figure which is
statistically insignificant.
Like
the traditional method, Saget (2014) observed
that the new approach did not reduce the problems of endogeneity, lagged effects of the minimum wage,
heterogeneity within low wage workers, as well as the problem of indivudal
panel data linked to selecting the appropriate control group to compare minimum
wage workers with.
It is also relevant to analyse the effects of fixing
minimum wage on employment. Saget (2014)
concluded that the overall employment effects tends to be small or nil if the
minimum wage is fixed to protect workers at the lower end of the wage distribution
or if the minimum wage increases in line with consumer prices and considering growth, labour productivity,
and wages. Nevertheless, marginal group of workers or those with low
productivity could be negatively affected by the fixing of the minimum wage.
Saget (2008) observed that developing countries sometimes set
their minimum wages either too high or
too low to serve as a
meaningful constraint on employers. When the minimum wage is set too low, it is
unlikely to be binding. This many result in the overall numbers of workers at
or below the minimum wage to be few. Saget (2014)
however suggested that low
minimum wages should not be used as a tool to protect business already nearing
mortality. It is was also suggested by Saget (2008)
that countries should delink the minimum wage from social benefits,On the contrary, a high minimum wage is likely to be
“binding”, but it could lead to high levels of non-compliance among employers;
which could result in many workers receiving below the threshold (Saget 2008; Saget, 2006).
Bernstein, J., & Schmitt, J. (1998). Making work
pay: The impact of the 1996-97 minimum wage increase. In F. Eyraud, & C.
Saget, Fundamentals of Minimum Wage Fixing (p. 76). Geneva:
International Labour Organization.
Borjas, G. J. (2013). Labor Economics. New York, New
York, United States of America: McGraw-Hill.
Brown, C., Gilroy, C., & Kohen, A. (1982). Times-series
evidence of the effect of the minimum wage on youth employment and
unemployment. Journal if Human Resources, 18(1), 3-31.
Eyraud, F., & Saget, C. (2005). The fundamentals of
of Minimum Wage Fixing. International Labour Organization. Geneva:
International Labour Organization.
ILO. (1970). Minimum Wage Fixing Convention, 1970 (No.
131). Convention concerning Minimum Wage Fixing, with Special Reference to
Developing Countries (p. 1). Geneva: International Labour Organization.
Retrieved March 6, 2015, from http://www.ilo.org/dyn/normlex/en/
Lemos, S. (2003). A menu of minimum wage variablesfor
evaluating emplqyment effects:. 3, 2. London: University College
London.
Rama, M. (1996). The consequences of doubling the minimum
wage: The case of Indonesia. In F. Eyraud, & C. Saget, Fundamentals of
Minimum Wage Fixing (p. 73). Geneva: International Labour Organization.
Saget, C. (2006). Fixing Minimum Wage in Developing
Countries: Common Failures and Remedies. Jakarta: International Labour
Organization.
Saget, C. (2008). Minimum Wage Levels in Developing
Countries: Common failures and remedies. International Labour Review, 147,
pp. 25, 34-41.
Saget, C. (2014, March). Presentation on "Minimum Wage
effect on Employment and Inequality". Slide 7-18. Turin, Italy: ITC-ILO.
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