The struggle for minimum wage
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THIS year, September 1 was observed as Labor Day in the USA and in many other countries. Labor Day, like May 1st in Bangladesh, is a national holiday in the USA, and is an opportunity to celebrate organized labor's strengths and its contributions to the US economy. Ironically, three days after Labor Day, on September 4th, dozens of demonstrators in many US cities were arrested for participating in protest marches to raise the minimum wage level. The two events happening in quick succession in one of the richest countries in the world highlight an issue that has emerged time and again in many shapes and forms across the globe. What would it take for us to pay the workers who toil to make the food we eat and the clothes we wear a decent living wage? I found this question asked repeatedly on social media in recent months. And, it is no secret that minimum wage is a life and death issue not only in the developing world, where workers often work 60 to 80 hours in factories under harsh conditions stitching shirts and jeans, or grinding away in farms, fishing vessels, orchards, and chicken farms, but also in most developed countries including the USA. So, the sixty-four billion dollar question is, why do we fail to guarantee the basic needs of the workers at the bottom of the pyramid, who report for work every day, but enjoy very little fringe benefits and paid holidays, and often endure extreme hardship for the comfort of a few?
India, China, and Bangladesh are but some of the countries where on various occasions attention has turned to low wages and poor working conditions. As these countries enjoy rapid economic growth and provide the cheap electronics and brand name clothing to the voracious Western consumers, the media and organized labor often raise their voice against the “sweat shops” in the East. Equally important, now it has also been focused on workers in USA, where many industries, including fast food, service, grocery stores, agricultural farm, and home health sector, to name a few, which employ workers who toil at minimum wage, or less when there is poor enforcement of minimum wage laws (MWL). Fortunately, there is no cause sacred to politicians and advocates of social justice than minimum wage. Whether you look at the US or Bangladesh, minimum wage legislation is often the hallmark of any political campaign as well as progressive thoughts. More than any other slogan, higher minimum wages can be regarded as an easy one for any aspiring political or leftist leader.
So, why do we witness such pushback from various circles? It would not be an exaggeration to assert that there is intense resistance even in rich countries and modern world history is replete with bloody clashes between camps supporting and opposing MWL or increase in minimum wage. Apart from universal franchise, minimum wage increase has always drawn the largest crowd and strongest voices since the industrial revolution began! Minimum wage paid to, or average wage of, ready-made garment workers has recently received global attention in the aftermath of industrial accidents in 2012 and 2013 in Bangladesh, even though the accidents were caused by fire and structural failures, and would have not been addressed by increasing minimum wage. However, the media and public policy has grabbed on to minimum wage legislation because the idea of “sweat shop” in developing countries raises a red flag in the public mind.
Resistance to increased wage comes typically from two sources: Employers and economists/policy makers. And they form a strong band. Employers see any increase in minimum as an attack on their profit margin. In this view, it is a zero-sum game. What workers receive is taken out of the pocket of the owners/managers. The origin of this belief is a simplistic microeconomic model currently used in all textbooks. This model has repeatedly been challenged by economists who took the lead from Piero Sraffa.
Another line of defense comes from employers who contend that it is against the interest of labor to raise wages whether in a tight market condition or in situations where underemployment prevails. According to this view, if price of labor goes up, employers can resort to using less labor and more capital per unit. However, this can be questioned. In a country such as Bangladesh or India where capital is expensive and returns on capital high, there is no economic rational to increase capital intensity.
It is curious that in the midst of all this, the president of the global retailer H&M Karl-Johan Persson has warned against raising the wage level for garments workers which might adversely affect Bangladesh's competitive position. He said, “Many companies buy into Bangladesh, not just us. The country must also take into account that jobs could be lost to other countries,” Persson told Die Welt. “The garment industry provides four million jobs that are paid well in relation to other jobs. Textile workers earn about as much as a teacher,” he said. While this line of attack might be well-intentioned, it is certainly very poorly considered. If the supply side of the market, i.e. the retailers, the buying houses or the garment manufacturers foresee any rise in the cost resulting from higher wages, it is incumbent on these parties to determine how the rise is to be mitigated. I will offer my arguments on this matter in a subsequent article. Allow me to mention that empirical evidence on the impact of MWL on labor market in the USA is inconclusive. And, from a global perspective, minimum wage is akin to human rights, and the positive impact on income and welfare easily outweighs the downward effect on the real income of fast-food consumers or customers of ready-made garments.
The writer is an economist, who lives and works in Boston, USA.
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