The minimum-wage debate:A case for sobriety and reasoning

Danny Roberts, Contributor

Whenever there is an announcement by the minister of labour of an increase in the national minimum wage, it has always sparked a controversial debate about the appropriateness of the increase. There are those who consistently argue, irrespective of what the increased amount may be, that it is simply not enough, that workers need a 'decent' wage in order to enjoy minimally acceptable living standards. Where the increase exceeds the rate of inflation, the argument still revolves around paying more, but where the increase is less than the inflation out-turn, a case is made out for the adjustment to be at minimum indexed to the inflation rate.

Then there are the others, equally consistent, who see any increase in the minimum wage as putting a strain particularly on small businesses, which is likely to lead to the shedding of jobs in order to save the business. The logical sequence to this argument is that these poorly paid workers would be better off without an increase, as it would ensure that they have a job, and where an increase is imposed upon them, any job loss must be laid squarely at the feet of Government.

The compelling point that the minimum wage is part of a human-rights approach that focuses on the right to have decent employment and help to reduce the level of poverty never seems to supersede the strict economic argument. That argument assumes even greater prominence during times of economic distress, and in our current recession we have seen the overwhelming response from the small-business sector, and even some large establishments, that the Government should not have granted an increase in the minimum wage but, instead, should have frozen the rate at the 2009 figure of $4,070 per week.

The arguments from both sides are invariably abstract, emotive and narrowly defined. From their respective vantage points, they overlook the wider social and economic implications that would embrace the scope of a minimum wage, too often not grounding their arguments in the trenchant analysis carried out on minimum-wage studies elsewhere. This is not to say that either of the two contending views is totally wrong or right, for the truth is there is an element of correctness in them both. But debate from an informed basis is always the preferred course to pursue since it contextualises the discussion and takes into account emerging trends and information which are important in influencing decisions.

Minimum Wage Policy in Jamaica

Since 1938, the colonial government has seen it necessary to regulate the minimum-wage rates in Jamaica through the Minimum Wage Act. Minimum Wage Orders were, before 1975, made specific to the bread, bun and cake bakery trade, the retail petrol trade, printing trade, dry goods trade, hotel trade, catering trade, laundry and dry-cleaning trade and rural public passenger transport. A national minimum wage was introduced in 1975, and we now have one covering all categories of workers with the exception of industrial security guards who are covered under the Minimum Wage (Industrial Security Guards) Order, 1982.

It is important to realise that because of the relatively low wage rates in some sectors/industries, the minimum wage in Jamaica would have an impact on the overall wage structure through its influence on wage settings and industrial relations. There is always, for example, some concerns about the impact of an increase in the national minimum wage on the outcome of wage settlements in the sugar industry, and on occasions adjustments have had to be made to collective bargaining agreements consequent to a previous adjustment to the national minimum wage.

The Minimum Wage Act establishes a Minimum Wage Advisory Commission "to consider and to advise the minister on all matters relating to national minimum wages and any other minimum wages which may be fixed under this act", as well as to monitor the minimum wage rates fixed by the minister of labour. The recommendation to the minister on the appropriate level of increase to be granted generally follows a series of public consultations, including with key stakeholders, on whether or not the minimum wage should be increased, and if the answer is in the affirmative, the amount of that increase.

Minimum wage is seen as a tool of macroeconomic management to provide some level of economic stimulation and contribute to growth in the society. It is often the case that establishing a national minimum wage and providing for periodic increases would help to stimulate consumption by providing more wages for the lowest categories of workers and remove them from any dependency on government welfare programmes. There is also the view that an increase in the minimum wage could result in an increase in workers' productivity.

Minimum wages, however, have first to be fixed and then adjusted, and the fixing of the minimum wage is guided by certain considerations which have universal applicability. The International Labour Organisation (ILO), a specialised agency of the United Nations set up as a tripartite body with representatives of government, employers and trade unions, has adopted a convention on minimum-wage fixing, Convention No. 131, from as far back as 1970. The convention seeks to provide a framework for the general application of determining minimum wage particularly in developing countries to ensure protection for wage earners. These conventions carry with them legal obligations to ensure that the provisions are adhered to by member countries. Ratification of a convention by a country is voluntary, and usually requires each member state to adopt laws which give effect to the convention. If there are particular groups of workers who may not be covered through the existing law, the ILO requires an annual report on the position of the law and practice in respect of covering them. Conventions that have not been ratified by member states have the same legal force as do recommendations. Governments are required to submit reports detailing their compliance with the obligations of the conventions they have ratified. Jamaica is yet to ratify the Minimum Wage Convention.

In its first article, the convention speaks to the fact that minimum wages should "have the force of law and shall not be subject to abatement". This means that the law adopted in each country to give effect to the minimum wage must make provision for penalties in the event of breaches without exception.

Many countries have established minimum wage laws, while no more than about 10 countries are without any laws governing minimum wage. This is not to say that no consideration is given to the establishment of minimum wages in these countries, their minimum wages are generally set through nationwide collective agreements. In Finland, for example, the law requires employers, even in non-unionised settings, to pay the minimum wage set in collective bargaining agreements by job classification for each category.

Objective Standards

We could bring some sobriety and reasoning to the debate on minimum-wage increases here in Jamaica. The gaps in both arguments could be addressed if we were to benchmark against the internationally applied standards used to fix minimum wages through the use of empirical data, and then to be guided by the methods used to grant annual adjustments. The ILO convention provides some considerations which must be taken into account in fixing the minimum wage in each country. These include:

(a) The needs of workers and their families, taking into account the general level of wages in the country, the cost of living, social-security benefits, and the relative living standards of other social groups;

(b) Economic factors, including the requirements of economic development, levels of productivity and the desirability of attaining and maintaining a high level of employment.

In general, most of the criteria which have been formulated to fix minimum wages in developed and developing countries are variants of the following four concepts: (i) the needs of the workers; (ii) capacity to pay; (iii) comparable wages and incomes; and (iv) requirements of economic development. This is an attempt to strike a balance between the economic and social concerns, and in many countries the minimum wage is fixed initially through empirical studies regarding the basic needs of a standard household.

Not so in the case of Jamaica, where we arrive at our figure for minimum-wage increase quite arbitrarily. The liveable wage study, which the minister proposed, becomes the absolute starting point, for it provides a far more pragmatic and evolutionary approach to fixing and adjusting the minimum wage. We may find, as Table 1 illustrates, that the required income for subsistence living may be beyond the real possibilities of the economy at the time. This is evidently nothing new for many developing countries and certainly not a case for an immediate and automatic adjustment to this level for the question of how much increase the economy can absorb at any given time has to form a necessary part of the equation.

The Impact on Employment

But the argument does not really end there, as there are still those who oppose the very notion of a statutory minimum wage in the first place because they believe it leads to labour-market rigidities and distorted wages. The settlement of a minimum wage, they argue, must be left to the sole device of a free market.

In support of the argument for minimum wages to be fixed by the market, there is the view that Government's intervention appears to give greater weight to social, rather than economic, considerations, which could have consequences for the level of employment. This is certainly not borne out by the studies which have been undertaken in the United States and a number of Central and Latin American countries. Nor is it borne out in the Jamaican experience when we compare the statistics over the last 10 years. There seems to be no correlative or causative effect on the unemployment rate in Jamaica even when there are substantial increases in the national minimum wage. For example, in 2002, the minimum wage was increased by as much as 50 per cent and, despite the predictions of a calamitous fall in employment, the unemployment figure actually decreased from 16 per cent in 2002 to 15.4 per cent in 2003. So, too, was the case in 2005, when the minimum wage was increased by 20 per cent and unemployment fell from 15.0 per cent in 2005 to 11.5 per cent in 2006. In both years, the increases were in excess of the rate of inflation.

Finally, as mentioned earlier, the fixing of the minimum wage is quite different from its adjustments. What we have described is how best to determine the level of the subsistence minimum or, as the minister of labour refers to it, 'the liveable wage'. This review of the minimum wage as a qualification of the basic needs survey should be done periodically. In many cases, it is recommended during a 10-15 year period.

But in-between the fixing of the minimum wage, there ought to be adjustments. The most common approach is the use of the consumer price index, as it provides the best guide on the evolution of the purchasing power of workers' incomes. While this may be the most reliable method of adjusting the minimum wage, there has to be a balance between that and the ability- to-pay factor, and so there may be a situation of partial indexation. What we have, therefore, been doing in Jamaica is adjusting the minimum wage without first fixing it; we hope that the proposed liveable wage study will finally provide an empirical basis on which we can logically argue about minimum wage increases in the future.

Danny Roberts is head of the Hugh Lawson Shearer Trade Union Education Institute in the Consortium for Social Development and Research at the Open Campus, UWI, Mona.