The latest publication by Caritas Malta, A Minimum Essential Budget for a Decent Living, has resuscitated the issue of the minimum wage. The legal minimum wage is the government’s most direct policy for influencing wage levels, especially for workers whose position in the labour market tends to be vulnerable.
The rationality of this intervention by the State in the wage mechanisms of the labour market is hardly ever questioned. Indeed, today almost all industrialised countries have a statutory minimum wage. However, workers are aware that the wage adjustment that can ensure that the purchasing power of their wages is well aligned to the cost of living can be better achieved through collective bargaining – rather than through State intervention.
The ideal scenario for a wage policy based on a fair degree of equity would be an all-unionised workforce and a State overseeing the macroeconomic consequences of collective bargaining in order to restrain the potential spiral trend of negotiated wage increases.
Low-pay and in-work poverty have always been major policy challenges
In such a scenario, union negotiators acting in a socially responsible way would internalise the external (third party) effect of negotiated wage pressure by trying to mitigate the impact of the increase in prices of goods and services provided by the company resulting from wage increases negotiated by the union. This of course sounds very utopian.
The Maltese workforce is far from being fully unionised. The great majority of private sector workers are not covered by a collective agreement. Among these there must be a sizeable number who – due to their weak bargaining power – have to contend with relatively low wages. The statutory minimum pay, by establishing a floor wage, aims at mitigating the workers’ vulnerability. The minimum wage may raise incomes but may simply be too low to lift families out of poverty. This is the bone of contention of the study by Caritas Malta.
Low-pay and in-work poverty have always been major policy challenges. Lately these challenges have become more acute as there seem to be glaring signs that the gaps among the disadvantaged and advantaged groups may have become wider.
The legal minimum wage forms part of government’s most direct policy for influencing wage levels. Reducing poverty is not the only objective of the government’s wage policy but it is a prominent one.
A very high minimum wage may result in job and income losses. While minimum wage is intended to support low-wage workers, the cost of employing them can be at the heart of concerns that the legal minimum wage might reduce employment or damage the international competitiveness of labour-intensive firms relying on low-skilled labour.
For the government, minimum wage increases as an element of poverty-reduction packages entail lower direct budgetary cost than direct government intervention. In spite of this, government may still opt to adopt alternative measures such as government transfers in order not to add extra cost to employers.
Tax burdens and other mandatory non-wage labour costs also push up the cost of employing minimum wage workers. The size of the overall tax burden has implications for how well the minimum wage performs at supporting low-wage workers and low-income families, while avoiding significant job losses.
Taking measures aimed at reducing the gap between the amounts an employer pays and the worker’s take-home pay can be a viable alternative to employers. Some countries have introduced payroll tax for firms employing minimum-wage earners. Measures aimed at ensuring a greater share of a given minimum wage and consequently adding to household income can be very effective in making work pay.
Such a policy is not shorn of potential dilemmas. Tax concessions or benefits that are targeted at low-wage earners make it less attractive for workers to progress to higher-paid jobs. They may also create incentives for wage underreporting. On the other hand, while a low minimum wage may result in undesirably low-pay jobs, setting the minimum wage to high levels leaves little room for rewarding employees in line with productivity and may also lead to job losses, informal work or reduced working hours.
Among the EU member states the minimum wage in Malta amounting to €168 per week is neither among the highest nor the lowest. However, statistics show that the minimum wage in Malta has not registered any increase in comparison to the average wage and the middle wage spectrum – the so-called median wage.
What the foregoing entails is that minimum wage adjustments are likely to be driven, in part, by political considerations, economic constraints and public pressures. While a review of the minimum pay should be made in the context of changing labour market conditions backed by valid and reliable data, it should not be shaped by the neoclassical theory according to which minimum wage adjustments have negative effects on employment.
Public consultations should be aimed at making recommendations to promote minimum wage adjustments that are transparent and predictable for the government, businesses and workers.
This may not be the patented solution but it may go a long way towards giving the seal of legitimacy to a policy related to the adjustment of wages.
Saviour Rizzo is a former director of the Centre for Labour Studies at the University of Malta