Minimum wage is a good idea, but not the right one
I need to choose my words carefully so that I don’t appear as a cold hearted capitalist, like my friend mentioned in one of his articles, when he was making an argument for adopting a minimum wage.
Like my friend, proponents of minimum wage argue that minimum wage is needed so as to ensure workers receive a living wage – one that will provide them with an income sufficient to purchase the bare necessities of life. The belief is that, a minimum wage can guarantee workers having an acceptable minimum standard of living. There is truth to this, no doubt. But we need to be clear under what circumstances such a proposition would flourish, especially when living in a global marketplace, with global opportunities.
My overall position is that a minimum wage is also likely to hurt the very people it aims to help. More importantly, it may affect the ability of lower-skilled workers to secure a job because employers will be reluctant to employ them if the minimum wage is higher than the value of what they can contribute – that is just a fact.
These workers would be denied the opportunity to work for a lower wage that reflects their skills and ability, even if they wish to. Now, at a very basic level, if the minimum wage for a house help is set at Rwf30,000, how many people would lose their jobs overnight? So, my view is that let us create the most employment as much as we can, and as society upgrades its skills, salaries will inevitably increase as a result of productivity gains.
Furthermore, companies that are unable to pass on the additional wage cost may become uncompetitive and decide to move out of Rwanda, taking away jobs from Rwandans. Contrary to what my friend believes, instead of helping low wageworkers, a minimum wage may lead to a lose-lose-lose situation: for our economy, the company, and most importantly, the workers whom we are trying to help.
Often neglected in debates on the minimum wage is the actual amount. If the minimum wage is set near the equilibrium wage for the poorest workers, there may be no effect on employment in the short term; but there may be no effect on living standards either! On the other hand, a significant increase in wages will make a big difference to the quality of life for those still employed, but the economic effects will be commensurately greater.
In addition, minimum wage legislation acts as a tax on employment. I am not saying that tax is bad, but at the same time we cannot ignore its effects on the overall attractiveness of an economy – that is the harsh reality. The minimum wage does not grow on trees: it is the employer who has to pay the top-up. Forcing an employer to pay more than the market rate for labour has the same effect on employer behaviour as a tax on every worker hired.
Finally, it might lead to inflationary effects. What happens when companies, shops and restaurants have an additional tax levied on them? Some of the costs may be passed on to the consumer. So the cost of living will go up. Even the corner shop has to employ people: they, too, will become more expensive. We may end up back at square one, with the new cost of living exceeding what the old minimum wage can provide for. Do we then increase the minimum wage again? And what does this do to our overall economic competitiveness?
There should be more debate on minimum wage – it took Hong Kong and South Korea more than a decade of debate before finally implementing minimum wage. Singapore is still debating this issue after a decade and a half, and even after attaining first world status. It is not just about common sense as my friend, whom I have tremendous respect for, seems to think. The economic race has gotten tougher than ever before, and any slight miscalculation, Rwanda will effectively price itself out of the market.
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