My ex-students asked me for my thoughts on minimum wages, which happened to be also the topic I set for our June Mid Year test this year. So this post is written for them!

First of all, the theory (that we learn in A Level Economics) says

An effective minimum wage that is set above the equilibrium wage will cause unemployment.

The market is supposed to clear efficiently absent of government intervention. This means that at the equilibrium wage - quantity demanded for workers will be exactly equal to quantity supplied of workers.

When you implement a minimum wage - you want to implement it at a wage to be higher than the current market wages. At a higher wage, employers are willing to hire less workers while at a higher wage, more workers will be willing to enter the labour market.

The quantity supplied now exceeds the quantity demanded for workers, creating a surplus.

This surplus of workers - is what we call ‘unemployment’.

Then why do so many countries implement minimum wage?

There are 2 key microeconomic goals that governments seek to achieve

1. Intervene in markets where resources are not allocated in an efficient manner

2. Reduce inequity

In addition, increased income inequality is an issue that comes with economic development (and therefore growth).

An extremely simplistic explanation goes this way (you already know the narrative)

As economies develop, they will go through economic restructuring. From agricultural-based economies to manufacturing, later from manufacturing to the provision of services and then now from services to what we are seeing now - the age of e-commerce, automation & AI.

Economic restructuring is an ongoing and relentless process like a train that waits for no one. As we go through each phase of restructuring, workers who possess the ‘skills of the day’ will be in demand and experience increase in wages and workers who work in industries facing ‘obsolescence’ or ‘no-growth’ industries like cleaning will see wages either declining or remain stagnant.

Governments therefore intervene to ensure that ‘no worker is left behind’ because of the economic development process. “Minimum wage” is one of the policy intervention that governments adopt and deploy to address the problem

Studies actually show that the impact that minimum wages have on employment are inconclusive.

But there is a possible explanation why studies are inconclusive.

Look at the diagram below. On the left you have a country which implements minimum wages to be just slightly the equilibrium wage, the ‘surplus’ of workers is small. On the right, you have a country which implements minimum wages to be significantly higher than the equilibrium wage, the ‘surplus’ of workers is greater.

It could potentially be the case (we will never know), that the studies where minimum wages had little impact on employment were because the minimum wage was set just slightly above the equilibrium wages while the studies where minimum wages had a significant impact on employment were the ones where minimum wages were pegged at a level significantly above equilibrium wages.

This is a logical explanation because

1. There is sometimes a lack of information about what is the ‘equilibrium wage’

2. Policy makers may not want to set minimum wages to be too high for fear of upsetting business-owners

What is almost a certainty though with minimum wages?

Minimum wages will increase the wage bill for some firms to varying degrees. Firms that can pass on the higher cost will pass it on to consumers through higher prices - which means final prices of goods and services will increases.

To what degree the price increase takes place will depend on

1. How much % do minimum wage workers take up as a % of their total labour force

2. The total % that labour takes up as a total proportion of cost of production

3. How much pricing power does the firm has

There will also be some firms that will shut down as the costs may make it unprofitable to carry on.

Minimum wages (in general) will force firms to increase productivity

There are some jobs where it is hard to measure productivity or hard to see increase in productivity.

In some cases - minimum wages will force firms to try to find ways to ‘increase’ productivity to stretch their dollar. Simply put, while minimum wages lead to an increase in production costs, it doesn’t change the revenue that firms would earn.

Firms will explore some of the following ways to increase productivity

1. Hire / keep only workers who are more productive than the average worker (think - an outstanding extra hardworking worker who can do the tasks of 2 workers)

2. Invest in automation or machinery / equipment to replace processes that originally required manual labour inputs

Say if we increase minimum wages, what would fast-food restaurants likely do - invest more in ‘automated self-ordering kiosk’ or smart kitchens and replace labour with machines (that is already happening).

Should we implement minimum wages in Singapore?

I’m an extremely big fan of Professor Tommy Koh - who has said we should implement minimum wages and cited Hong Kong as an example of minimum wages lifting 140,000 out of poverty

Professor Lim Chong Yah, a very well respected Economics professor has also once suggested to implement ‘minimum wages’

and of course, I was impressed with Dr Jamus Lim during his debate on TV, who has discussed WP’s proposal of a $1300 minimum wage in Singapore

You cannot just ignore these thoughts and opinions - if well respected and eminent figures like the 3 of them says we should implement minimum wages, we should study how and give a response to them, ‘can or cannot? why or why not?’

So I have a few thoughts & questions that I don’t have the answer to, but the answers should lead us to have a clearer & more conclusive answer to whether we should implement minimum wages

If we implement minimum wages - what should be the level set at? and how do we set the minimum wage?

Remember that implementing minimum wages causes unemployment, and how much depends on largely where you peg the minimum wages at. If you peg the minimum wages at a level too near the equilibrium wage then there may be no point, if you peg the minimum wage at a level much higher than the equilibrium wage then you have to worry about the unemployment issue.

My feeling about the $1300 proposal by WP will be that it would fall under the cautious, very near equilibrium wage region.

Also, how do you peg the minimum wage? What is the measurement unit? Do you peg it based on a monthly rate or an hourly rate?

If you peg at monthly rate - then what happens to part time jobs or jobs with different number of working hours

If you peg at an hourly rate - would it encourage workers to take as long as they can to finish a specific job?

Who are the beneficiaries of the minimum wage policy?

Do we implement minimum wage across the board? Does that include foreign workers?

Would the minimum wage policy apply to casual part time school holiday student workers?

Might employers potentially favour younger casual part-time workers as opposed to full time more elderly workers?

What will be the increase in prices as a result of a minimum wage policy?

When prices of food, transport, healthcare and daily necessities go up as a result of higher labour costs - are we going to be able to accept such an increase - as a collective?

Solve the problem, not fixate on the policy tool

The problems that minimum wages as a policy tool is trying to solve are issues associated with income inequity which are

1. Access to healthcare

2. Access to education

3. Access to basic necessities

4. Social mobility

To that, I say,

Yes - to addressing income inequality and debating on the issues and what is needed to improve on the problem

Maybe - to minimum wages (if we can figure out the answers to the questions above)

No to focusing on the wrong things like scolding people for their views…

Note: I like white shirts and blue shirts, as long as they are good shirts.