The issue of the adequacy of the minimum wage emerged following the publication of the Caritas report which, in essence identifies three segments: namely families with two children, single parent families with two children, and pensioners. Based on an elaborate costing of a basket of goods and services necessary for a decent standard of living, the study establishes the income that these segments must earn to provide for this basket and proposes measures to enable them to earn such an income, among which is a gradual increase in the minimum wage.
I believe that referring to the Caritas study simply as a report to raise the minimum wage does a disservice to the validity of the study, especially since this recommendation – raising the minimum wage – is one of 10 policy recommendations mentioned.
Employers do not question the methodology of the Caritas study, and it is understandable to conclude that a family with two adults and two children need an income of €11,500 to make ends meet, while an elderly couple would require €6,500 as a minimum annual essential budget for a decent living. The main issue is whether an increase in the minimum wage would actually address this issue.
Proponents of the Perversity Thesis contend that policies that try to improve social and economic well-being are counterproductive. Economists like Milton Friedman argue that the concept of a minimum wage works against the welfare of those it is intended to help, since it discriminates against low-skilled workers and threatens their chances of employment.
I do not strictly subscribe to this point of view, and believe that the existence of a minimum wage has provided important safeguards for our society. Yet it also implies that jobs whose level of productivity is below the minimum wage become illegal, and such jobs will be lost. This will mean that vulnerable groups could end up unemployed due to marginal jobs becoming automated, among other reasons.
The key argument is that, although a minimum wage is necessary from a social perspective, wage setting is ultimately determined through productivity and competitive constraints. No company will employ workers whose productivity is lower than the cost of employing them.
Therefore the setting of a minimum wage has to be carefully calibrated at a level which provides for a basic standard of living, but which – more importantly – does not exclude anyone from employment. It is worth mentioning that the minimum wage in Malta is the highest in the Mediterranean, excluding France. Within the European Union, Austria, Denmark, Finland, Italy, Sweden and Cyprus do not have a minimum wage.
No company will employ workers whose productivity is lower than the cost of employing them
This is why the Malta Employers’ Association’s view is that, rather than raising the minimum wage itself, a major objective should be to minimise the number of families actually living off a minimum wage, for example through upskilling of employees, and to increase the labour participation rate.
In Malta, a working couple with two children would earn well above the €11,500 which the Caritas report establishes as necessary to live decently, even if both parents earn a minimum wage, which is unlikely. Their income will exceed €18,000 per annum. In cases where it is not possible for one of the parents to find employment – for example to take care of a disabled child – there should be adequate state-funded intervention to provide focused assistance.
There is no need to risk destabilising the labour market by raising the minimum wage by more than the current indexation to the retail price index. Pertinent questions arise: how many persons take home just a minimum wage in Malta?
How many of them belong to single income families with two children? How long have they been in this situation?
In 2012, the Caritas report found that only three per cent of families with two parents and two children were unable to afford the essential basket of goods and services, as against 53 per cent of single parent families. The implication here is that it is not the level of wages which is pushing such families towards poverty, but social circumstances which require specific fiscal and social instruments to address this issue.
Raising the minimum wage also fails to address the plight of pensioners who cannot make ends meet.
It is difficult to contradict the idea of increasing the minimum wage as it has a strong emotional appeal which can distort rational thinking. It is easy to brand opponents as being antisocial, or that employers’ sole concern is that of keeping labour costs down. Such criticism ignores the fact that employers are fully aware that weak purchasing power is not only of concern to those affected and to civil society, but is a threat to their business as well.
Yet well-being and purchasing power can be raised to meet society’s expectations through higher productivity and value-added, coupled with policies that ensure that wealth generated is distributed fairly among society.
I hope that there is a rational, objective discussion on this matter by the social partners, and that, at political level, the debate will not degenerate into a bidding session for votes by the political parties.
Joe Farrugia is the director general of the Malta Employers’ Association.