The recent call by Caritas Malta for a revision of the minimum wage may lead to a renewed debate about the case for or against raising this wage, which since its introduction 44 years ago has only been adjusted for changes in the cost-of-living index.
The expected battle lines have already emerged, with trade unions strongly supporting Caritas’s call while employers have belittled the effect of a raise on low-income and poor families.
Prime Minister Joseph Muscat has welcomed a debate on the issue. Back in 2012, when a previous Caritas study had first proposed raising the minimum wage, Muscat had emphasised that, if elected, the Labour Party’s priority would be employment creation and that living conditions would be addressed through other measures, such as the reduction in utility bills.
On the other hand, the Nationalist Party immediately joined the fray with criticism about a government that has allegedly “completely lost its social conscience”. Nevertheless, social justice shadow minister Paula Mifsud Bonnici conveniently avoided any commitment by stating that the PN would only take a stand “after the appropriate discussions have taken place”.
Of course, the PN would have us forget that it had every opportunity to revise the minimum wage during its 25 years in power but failed to do so.
It similarly would have us believe that poverty is on the rise, when Eurostat figures unequivocally show that the Labour government has reversed the rise that occurred under the previous administration.
Overall, it would appear that modest rises in minimum wages are not that harmful
The fresh Caritas study conducted by Leonid McKay et al, is a follow-up to that published in May 2010. While in the first study a basket of essential items had been assembled and its cost estimated on the basis of the average spending of the average Maltese household, the current study is based on the budget standard approach rather than the average consumer expenditure. It sets out to establish a basic minimum threshold which would be unacceptable for any household not to attain.
The employment effect of the minimum wage is one of the most studied topics in all of economics. Most research shows very little effect, but there is a substantial minority of studies that show the opposite. Though the general weight of evidence is on the side of little or no employment response to modest increases in the minimum wage, it isn’t an overwhelming consensus.
I have sifted through dozens of studies. For example, in their path-breaking study of the fast-food industry in New Jersey and Pennsylvania, economists David Card and Alan Krueger found no indication that a rise in the minimum wage reduced employment. On the other hand, economists David Neumark and William Wascher report a consistent, though not statistically significant, negative employment effect.
I would say that the upshot of the empirical research is that minimum wage increases are consistently associated with statistically significant and economically meaningful increases in the wages of affected workers. At the same time, it is striking that, often, the weight of the evidence is either inconclusive or suggestive of only small effects on the employment channel of adjustment.
Writing in this paper, Saviour Rizzo (May 21) rightly points out that low-pay and in-work poverty have always been major policy challenges, particularly becoming acute when income distribution has become wider. And they have.
If we compare the pre-crisis Gini Coefficent in 2006 with that in 2014, we find that inequality of incomes in the Eurozone has worsened by 1.6 percentage points, being as high as 3.9 points in Germany and as low as 0.6 points in Malta. (The Gini coefficient is a measure of the statistical dispersion of income in a country.) Some countries, though, have seen a better distribution of incomes, like Portugal (+ 3.9 points).
This reflects, to a great extent, the fact that the monthly minimum wage as a proportion of the mean value of average monthly earnings has decreased from 50.6 percent in 2008 to 46.9 percent in 2014. This compares with an improvement of 6.2 percentage points in Poland and 2.7 percentage points in the U.K.
One other indication of the trends is that the minimum monthly wage in purchasing power standard (adjusting for price differences between the different member states of the EU) has increased by 32 percent over a 28-year period in Malta, but by 46 percent in the UK and a stunning 167 percent in Poland. As a result, while in 1992 Malta’s PPS wage was higher than Poland’s by a factor of 2.3, by 2016 this had gone down to a factor of 1.1.
There is no doubt that the worsening Gini coefficient in Malta and the minimum wage gap versus other countries are also due to the re-dimensioning of the Maltese economy from low-cost manufacturing to services, particularly financial services, that pay above-average salaries. This is borne out by the fact that the total salaries paid to professionals and associated professionals as a proportion of the total salaries paid in the whole economy rose from 32.4 percent in 2005 to 36.1 percent in 2011.
(It is regretted that like-for-like comparisons are not always possible due to insufficient data either from Eurostat and NSO for the data series, geographical coverage, or time series concerned.)
It is not possible here to go into the nitty-gritty of the theoretical debate, but the most likely reason for the preponderant view that minimum wage increases are not so bad, is that the cost shock of the minimum wage is small relative to most firms’ overall costs and only modest relative to the wages paid to low-wage workers.
This is because employment is not the only channel of adjustment. Employers can, and do, reduce hours, non-wage benefits, or training. Employers can also shift the composition toward higher skilled workers, cut pay to more highly paid workers, take action to increase worker productivity, increase prices to consumers, or simply accept a smaller profit margin.
Workers may also respond to the higher wage by working harder on the job. But probably the most important channel of adjustment is through reductions in labour turnover, which yield significant cost savings to employers.
A recent study about the effects of minimum wage adjustments in Malta (Melchior Vella, BOV Review, 2014) concluded that: average wages tend to rise by some 0.6 percent for every one per cent change in the minimum wage, meaning that the impact of the minimum wage change would be diffused in the wider economy; there would be a minimal decrease of 0.2 per cent in short-run employment and a 0.5 per cent decrease in long-run unemployment; and a no-adjustment scenario also has consequences, in that a small benefit-wage gap could make unemployment a more attractive proposition than employment to low-income persons.
Overall, it would appear that modest rises in minimum wages are not that harmful. In fact, there are indications that, rather than increasing unemployment, increases in minimum wages tend to cause a slowdown in employment growth.
On the other hand, consider that in the 21 EU countries with a minimum wage, the average unemployment rate of 11.8%, compares with an average unemployment rate of 7.9 percent in the seven countries without mandated minimum wages. The gap widens to 8.2 percentage points when measuring youth unemployment.
Perhaps Nobelist Milton Friedman was correct to quip that: “A minimum wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills.”
It is important that the national minimum wage is not confused with the so-called living wage, because the Caritas study relates a lot to the latter. The former is understood to be a specific compensation per hour which legislation demands that an employee should be paid. The latter is a wage that is based on what the employee may need to enjoy a reasonable standard of living.
To the average reader, this may seem confusing. There is no clear-cut answer, and as always, policymakers may need to proceed on the basis of what appears just in society’s eyes, rather than what can be scientifically proven to be the result.
Frans Camilleri studied economic s at Oxford and East Anglia universities.