Good Honest Dollar $$

Debates about the setting of minimum wage levels typically result in a range of perspectives and approaches being put forward by different parties.

Unions and workers, along with some social groups, tend to place strong emphasis upon increases in the cost of living and the financial pressures confronting low income workers.

Employers, on the other hand, feel that the need to control inflation, in addition to any uncertainties in the economic outlook, should be given paramount importance.

Whilst the debate may involve a certain degree of self interest, both camps raise legitimate concerns. 

In this post, I will not deal with the debate about whether or not a minimum wage should exist at all – that debate will probably be the subject of another post at some stage. Instead, I would like to focus on the question of where the minimum wage should be set.

Here are my thoughts – readers are encouraged to add their own:

 
(1) Minimum wage levels should exceed the poverty line.

The earnings of full time workers should be sufficient to cover the cost of food, clothing, accommodation and other basic necessities for a reasonable sized family.

To be sure, workers on the minimum wage should not expect to be able to afford luxury items. However, every employee who puts in an honest day’s pay should expect to provide bare necessities for their family.

There appears to be little point in having a minimum wage at all if the level at which it is set is not sufficient to meet basic needs of workers.

 
(2) Minimum wages should comfortably exceed unemployment benefits.

Personally, I am not opposed to the concept of unemployment benefits, particularly for the majority of recipients who actively seek gainful employment.

Nevertheless, I do feel that there should be a significant gap between those who are in gainful employment and those who are recipients of unemployment benefits.

(Let me stress that my comments here relate specifically to unemployment benefits. My comments do not relate to other forms of welfare, such as disability support pensions or old age pensions)

 
(3) Minimum wages should at least keep pace with inflation.

To be sure, adjustments to minimum wages should be modest so as not to cause unnecessary inflationary pressures.

However, low paid workers should at least be entitled to expect their incomes to keep pace with the cost of living, particularly in cases where workers achieve productivity gains on a consistent basis.

There are, I believe, two temporary exceptions. The first exception occurs where the economy experiences a period of stagflation – where high levels of inflation are accompanied by economic stagnation or recession. The second occurs in a period of hyperinflation.

In either case, minimum wage adjustments which keep pace with inflation may be deemed to be inappropriate on economic grounds.

 
(4) Executive salaries should not be a major factor.

Frustration on the part of low paid workers at sky-rocketing levels of executive remuneration is understandable, particularly in cases where those same executives preach about the need for wage restraint. 

However, the issue of appropriate levels of executive remuneration should be considered independently to that of appropriate minimum wage settings.

Minimum wage settings should take into account factors such as the need to provide reasonable living standards for the low paid, the need to reward workers for productivity gains and the economic impact of minimum wage settings on the broader economy.

These considerations are of paramount importance, and whilst executive remuneration is an important issue in itself, there are more important factors to be taken into account in the process of setting minimum wage levels.

 
(5) Minimum wages should be linked to productivity growth.

Productivity growth should be a key factor in determining the appropriate size of minimum wage adjustments, both from a viewpoint of social equity and fairness as well as from an economic standpoint.

From a viewpoint of social equity, employees should be entitled to share in the benefits of productivity gains. The process of linking minimum wage adjustments to productivity helps to ensure that workers who are not in strong bargaining position receive their fair share of such benefits.

Also, productivity growth is a critical factor in determining the size of minimum wage adjustments that is sustainable without causing undue inflationary effects. Adjustments which do not exceed the growth in productivity have no inflationary effect. The increase in the price of labor resulting from such adjustments is offset by the increase in labor productivity. Furthermore, adjustments which marginally exceed productivity growth will be inflationary, but their impact will be moderate.

However, minimum wage adjustments which exceed productivity growth to a significant degree fuel domestic inflation to a considerable extent, not to mention their impact upon economic growth and job creation. Such adjustments are unsustainable from an economic viewpoint.