Strengths and weaknesses of a minimum wage system

Published Date: 23 Mar 2015

INTRODUCTION

Minimum wage is not something new whereby it has already been used in others country many years ago. The first minimum wage was instituted by the Fair Labor Standard Act of 1938 and legally-mandated minimum wages have existed in the United States for over sixty years. Even our nearby country such as Indonesia also practice minimum wage in their country. The effect of minimum wage is depending on the structure of labor market. For example, in a perfectly competitive labor market, an increase in the minimum wage will decrease the overall level of employment (Abdulahad & Guirguis, 2003).

According to Y.B. Datuk S. Subramaniam 2010, Ministry of Human Resources Malaysia, our wages did not increase much over the years. Base on the data from the World Bank report, for the last 10-15 years our wage only increase 2.6%. According to our National Employment Return 2009, 34% of 1.3 million employers earn less than RM700 which means their earning in below the poverty line income level that determined by our government at RM720. These lower income groups mostly come from urban areas and work as labor. They are always facing difficulty in meeting their basic demand due to the increase in inflation and cost of living but wages did not increase.

Normally people will think that low-wage workers will be benefit from the practice of minimum wage because it will increase their total wage income (Danziger, 2009). However, minimum wage will also cause some negative consequences to different perspective of economic.

Strengths of Minimum Wage

Increase the standard of living for the poorest

In the Neumark and Wascher study, they conclude that the increase in minimum wage would probably help poor family escape from the poverty. As mention above, our wages did not increase for the past 10 years but the inflation still happen and cause higher standard of living. In Malaysia, there is about 34% of employees’ wage is below the poverty line. If the minimum wage is applied, this can ensure that they will at least get enough money for their basic living need.

Prevent loss of labor force

Recently we are experiencing loss of Malaysian to other country such as Singapore and Australia. This is because their country wage structure is higher than us. Our government had spent a lot of money to train our people but after the training they tend to go oversea to work instead of staying in Malaysia. We are now losing skilled Malaysian to the other country for no other reason but because of wage.

Motivates and encourage employees to work harder

According to the efficiency wage model, employees with better paid will be more productive. That means if a firm willing to pay their workers with a wage higher than the minimum wage, it will motive them to be more responsible in their task. Akerlof (1982), explain this motivation as a gift exchange motive, such as a a buyer willing to pay more than the minimum price to buy certain service due to the effect of the terms of exchange on the norms.

Encourage people to work instead of involving in crime

Cost of living is increasing, transportation cost higher than before, food become more expensive, but workers salary did not increase and now is not enough to cover their daily expenses. In order to get enough money to sustain life they will think of other ways including involve in illegal activities such as selling drug or kidnap people. However, if minimum wage is applied, then people will at least get enough of money to sustain life. No one will be willing to take the risk to be involved in crime unless it becomes necessary.

Weaknesses of minimum wage

Increase the unemployment rate

Diagram (a): wages vs employment ratedigram.bmp

In the diagram it shows the relationship between wages and employment rate. In perfectly competitive labor market, the increase in minimum wage will increase the unemployment rate. The more elastic of the labor supply and demand are, the greater the unemployment consequences of the higher minimum wage (Abdulahad et al, 2003).

Increase the investment of firm

Due to the increase of the wage, the production cost of a firm will also increase and require more investment. If a firm chooses to maintain the production cost, then they will reduce and replace the number of workers by upgrading the technologies and indirectly will also lead to unemployment. Besides that, when the investment is high it might also stop the foreigners to invest their money into our market.

Discourage for further study

If everyone is able to earn money that is enough to sustain basic need, then people will tend to maintain their current job and do not want to go for further study. This can also apply to the poorer because they need the money to fulfill their basic need and at the end they would not have enough time and money to go for further study.

Greater effect on SMEs

Most of the company in Malaysia is consider as small and medium enterprise (SMEs) such as coffee shop or mini-market. If the national minimum wage is being imposed and causes the labor cost to be increase, it will result many of these enterprises to shut down. At the end it will cause a lot of difficulties for the nearby resident.

Conclusion

From the discussion above, it shows that there are both positive and negative outcome for the practice of minimum wage. The government has to decided wisely once for all whether is it worth to implement the national minimum wage.