The minimum wage is a terrible idea. If you must have it, keep it really, really low.

This blog post is for the record, only, being a compilation of my views – and other related views – on the minimum wage. In brief I oppose a minimum wage but if it has to be established, it should be kept really low.  

==INDIAPOLICY DEBATES==

My view, 11 April 1998

Minimum wage: I have been involved in its implementation and know that this breeds corruption and other nasty things. In a fully computerized economy like USA this might work (even here ALL economists point out that it is a harmful thing and distorts incentives), but in India any control has bred and will breed corruption. Nobody actually receives a minimum wage: only the inspectors help increase the cost of the employers by taking bribes to show that the minimum wage laws are being upheld. Legislataion without a fool-proof (and I really can discuss any of these proposals since I have seen these in the field) method of implementation, is quite dangerous. We need to reduce, not increase, our laws.

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My view 16 April 1998

I close my contribution to this extremely critical debate (since it determines the fundamental underpinnings of the Manifesto) by asking discussants to propose to me – as a teacher in the National Academy of Administration – what is the formula or methodology for determining any minimum wage that you would like me to teach these top bureaucrats.

Please propose any scientific and mathematical method within one page, and I will seriously consider your formula to determine a “fair” or a “minimum”  wage. The formula should be completely context-free. It should be implementable blindly by a computer by simply feeding in the data on the independent variables. The formula should also be supported by a theorem which shows that this formula is welfare enhancing for the entire society.

there is no way but the market solution, to determine a “fair”  and optimal wage in ** all ** situations.

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My view, 17 April 1998

Minimum wages in the USA have been kept as low as possible through the effort of hundreds, nay, thousands of economists, who have always found minimum wages to be deleterious to employment of unskilled workers (the poor, basically).

Finally,

“The recognition that the minimum-wage law has adverse effects has made legislators reluctant to update the law frequently. Between 1981 (when the minimum wage was raised to $3.35) and 1990, prices rose 55 percent. Yet it took nine years and much debate to update the law and the result was only a 13 percent increase.”

The Minimum Wage Study Commission set up by the US government clearly showed that minimum wages hurt the poor.

(This material is from a basic econ. text book: Principles of Economics by Henderson and Poole.  Please pick up ** any ** principles textbook on economics to study why min. wages hurt the poor: and here I am not even talking about its implementation in remote villages of India.)

This low increase is clearly one of the strong reasons for the continued low unemployment in the US economy, and its continued growth, leading to prosperity and most leading to most workers earning far higher than the minimum wage, automatically. By the way, these poor folk who are now employed at these “low” wages, are at least producing something, and crime in the USA has been falling consistently through the decade.

So much for economists who are hell-bent on saving the poor by eliminating the concept of minumum wages (the concept was never proposed or promoted by any economist; it only originated after the great depression by many well-meaning, socialistically thinking people).

No, there is NO formula in economics to arrive at min. wages. There is no way known to mankind to do that, unfortunately. If we allow everyone a choice, of course, we can arrive at 280 million possible wages in the USA itself. I propose a minimum wage of $2000 per minute, for me. Please propose other alternative wages and we can agree on the highest (!)

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Parth Shah’s comments, 22 Nov 1998

The employers have the option of not hiring or firing those already working if their marginal productivity is below the min wage.  If a worker’s contribution is of Rs. 10 an hour then it won’t make sense to hire him or keep him if i have to pay him anything more than Rs. 10/hr. If, say, the min wage is Rs. 15/hr, I’ll let the workers go whose production is not valued at that level. Now who is likely lose the job in this situation?  The newly employed, less experienced and skilled, or a person of a particular race or caste or gender I don’t really like. So the people who are able to keep the job may benefit to some extent by the new min wage, but other poor will lose out.

Given the higher labor costs, it becomes profitable to employ more capital intensive methods of production–buy more machinery instead of labor.  The power of the public sector unions in India explain why these firms are more capital intensive than expected given the abudance labor in India.  Given the wage structure of public sector employees it’s rational to be more capital intensive.

One may say that for a time some low-wage workers may benefit at the cost of employers but many more workers will surely lose in the long run.  And most importantly, those who lose are really at the bottom of the labor market, the alleged beneficiaries of the min wage.

parth-

==FURTHER VIEWS==

Minimum wages protect union jobs but make the poor unemployable.

The Case Against the Minimum Wage (Part One)

The Case Against the Minimum Wage (Part Two) by Jon Riley

Homeless Man Takes Stand Against the Minimum Wage

The Minimum Wage: Good Intentions, Bad Results

Raising the Minimum Wage: Bad Ideas Have Consequences by James Sherk