Saturday, July 11, 2020

The big debate: Higher wages lead to job losses or we thought so….

BY BONNIE MODIAKGOTLA

As Botswana braces for the general elections coming later this year, the country’s main opposition party, the Umbrella for Democratic Change (UDC), has proposed a P3, 000 minimum wage, thrusting the spotlight on the ongoing and highly contentious national debate about workers’ wages.

The opposition party was last year unsuccessful in its motion to convince parliament to adopt the decent living wage – which the opposition has touted as an answer to the disparity between the existing minimum wage and the ever-rising costs of living. Frustrated by the ruling party, which is in majority in parliament, the opposition has now turned the minimum wage into a campaign tool.

While the ruling party, and by extension the government, has balked at the opposition’s proposal of living wages, they promised to review the low wages through the Minimum Wages Advisory Board which is said to be currently reviewing the minimum wage which was last changed in 2017. Data from Statistics Botswana, contained in the Formal Sector Employment Statistics 2018, shows that minimum hourly rate increased 52 percent between 2009 and 2017. The current minimum hourly wage rates range from P3.21 to P5.79.

Still, opposition has branded the government’s move as attempts to buy time during elections, and that the government’s wages will still be low. The opposition has taken to the campaign trail, promising Batswana at least minimum pay of P3, 000. Though the opposition is yet to give a plan on how they intend to implement the higher wages, the proposal has been met equally with excitement and criticism across the political divide.

Kenneth Matambo, the country’s minister of Finance and Economic Development, has publicly derided the P3, 000 minimum wage, which has found a fervent promoter in Duma Boko, the leader of the opposition party. Matambo said a high statutory minimum wage will lead to collapse of informal sector, and as a matter-of-fact, it will do more harm to those it intends to help, as they will be out of jobs.

As the country remains in a gridlock on whether minimum wage will work to stem income inequality or actually lead to massive job cuts, the polarizing debate has become a common theme across many countries, spawning many academic researches to unravel the effects of raising wages. In addition, some of the recent research goes against what many detractors have long held as a sacred truth: high minimum wages leads to job losses.

The economic powerhouse, United States of America, this year voted to gradually to raise the minimum wage from $7.25 to $15 an hour in a period of five years. In fact, Seattle, a city in the state of Washington, had already raised its minimum wage to $15 an hour, making the city a candidate for various studies on higher wages. In a study done last year, titled “Minimum Wage Increase and Individual Employment Trajectories” by a team of six researchers found surprising results.

The study revealed that Seattle’s minimum wage hikes brought benefits to many workers employed at the time, while leaving few employed workers worse off. The key consideration from the study is that minimum wage affects different groups of workers differently: people who worked more hours before the minimum wage saw a significant increase in their wages and only a small percentage decrease in hours worked, leading to a healthy bump in overall pay.

For workers who worked less hours before the increase saw almost no improvements in overall pay. While their hourly wage increased, their hours fell substantially but still earned roughly the same wage while working few hours, with the researchers said it is a trade-off many workers will accept ÔÇô same pay for less hours.

In the final group of workers – made up of the potential new entrants who were unemployed at the time of the first minimum wage increase ÔÇô were found to have fared the worst as the increased wages had priced some workers out of the labour market.

However, the conclusion was damning to those who oppose minimum wage increases, with the researchers concluding minimum-wage increases helped people who were already working on low wage jobs, but hurt those who were not already working. This flew in the face who claim that high wages lead to swift job losses for those employed in low wage jobs.

Arindrajit Dube, Associate Professor of Economics at the University of Massachusetts, holds similar views to the Seattle researchers. Dube, who specialises in labour economics, public finance and political economy, agreed that increasing minimum wage improves the lives of people at the bottom of the wage scale without throwing lots of people out of work. In his research paper, Minimum wages and the distribution of family incomes in the United States, Dube found robust evidence that increased wages reduced the poverty rate.

The argument against increasing minimum wage often relies on what is called “economism” ÔÇô the misleading application of basic lessons from Economics 101 to real world problems, creating the illusion of consensus and reducing a complex topic to a simple, open and shut case, argued James Kwak in his book, Economism – Bad Economics and the Rise of Inequality. Kwak poured scorn on the argument that lifting the minimum wage results in job losses. Instead, he says looking at historical experience, there is no obvious relationship between minimum wage and unemployment.

This, Kwak argues, is because the real world does not behave so predictably. He says if labour costs increases, many companies can recoup cost increases in the form of higher prices because most of their customers are not poor, the net effect is to transfer money from higher-income to lower income families. In addition, Kwak posits that companies that pay more often benefit from higher employee productivity, offsetting growth in labour costs. In his final assessment, Kwak said higher pay increases workers’ buying power because poor people spend a relatively large proportion of their income, thus higher minimum wage can boost overall economic activity and stimulate economic growth, creating more jobs.

“The supply and demand diagram is a good conceptual starting point for thinking about the minimum wage. But on its own, it has limited predictive value in the much more complex real world,” he notes in the book.

Sennye Obuseng, an economist who has worked for one of the United Nations agencies, holds that the minimum wage is a deeply ideological construct. He offers that it is applicable based on each country’s economic fundamentals, with poorer countries finding it hard to offer decent wages.

“But would that be true for an upper middle income country such as Botswana? I think not. We are right now in the midst of an animated debate on the living wage. I wish it could get more structured and better informed and move beyond politics because as an upper middle income country, we have earned the right to look at higher order satisfactions (ethics, economic inclusion, social and economic justice, and human rights) rather than the basic survival issues much poorer countries such as Malawi would be concerned with,” he said in an emailed response to Sunday Standard.

On whether minimum wages prices people out of the labour market, Obuseng says you have to look at the industrialised world for guidance on the likely effects of an effective minimum wage since the evidence base is much stronger there. While he explains that the body of research on the effects of higher minimum wage is vast – with both sides of the debate can citing papers supporting their position ÔÇô it now appears that the evidence is staking up in favour of higher pay.

“So whether minimum wage increases hurt jobs or not depends on a number of factors, principally the magnitude of the increase, the manner in which the increase is administered, and the overall economic and policy context. A huge increase, administered as a single dose, is certain to be destructive,” he warned.

“However, even a big transition such as that envisaged by the US by 2024, from just over $7 to $15.00 an hour, can be introduced responsibly over time with minimum to no loss of jobs. The managed introduction allows the economy to adjust to the increase. This is the experience of some cities and states in the US.”

Obuseng added that a steady increase of minimum wage gives companies time to adjust, resulting in increased efficiency as the firms restructure to accommodate the higher wages. Secondly, he concurs that higher pay leads to improved productivity, as workers are motivated, and thirdly, the stimulus effects of wage increase drives up investment, growth and employment.

“It is lazy and unjust, for a country to rely too much on wage restraint for job creation. Labour is too complex a ‘commodity’ for us to think about it the way we would other commodities. Depending on the baseline, paying labour better can improve the performance of the economy on a wide array of metrics, including job creation,” said Obuseng.

“It might appear complicated but if we were to pause and reflect on the extent to which poor wages put human capital to waste amongst the poor and the working poor, we might begin to appreciate the true costs of sub-living wage pay. It is scary. In my view, if you are a country with means, you want to get out of sub-living wage pay as soon as possible because it destroys human capital.”

Botswana has not quite made inequality and economic inclusion a priority in the policy objectives, he said, before adding that the country has faltered badly on empowerment, from education, to health, to job creation to citizen economic empowerment.

“Earning power is a function of human capital and human agency, so when you falter to the extent we have on human capital development and job creation, you plant the seeds of inequality because you are going to have a large population of people with defective agency and no jobs.”

Obuseng also took issue with the country’s failure to restrain the worst instincts of capital and political power. “Both have run amok in concentrating wealth and access to resources in this country, sometimes in very crude ways. So, in effect, the nation has been dealt a double whammy on inequality ÔÇô stuttering empowerment and the unrestrained influence of capital and political power on economic outcomes,” he said.

Obuseng has dismissed fears that a higher minimum wage in Botswana will send consumer prices soaring, resulting in inflation that will wipe out what was supposed to be an increase in pay. Instead, he said only reckless increases in wages would result in that. Moreover, he explained that prices run out of control when supply does not respond to increases in demand, an unlikely case for Botswana is it imports heavily from South Africa, which means the country’s increased demand will be met by rising supply from its economic giant neighbour.

The country’s lack of clear data on the job market has affected policy prescriptions, argues Obuseng, and opined that minimum wage would be far better if adequate data was available, a development  that would result in informed decisions.

Has the weakening of unions or lack of unionisation, contributed to less powerful employees and customers? Obuseng says absolutely. He explains that weak unions and low unionisation of workers weaken workers’ bargaining position.

“There is no doubt about that. That is why it is important for unions to find ways of working together and to stay true to their primary calling, the welfare of workers. It is also important for workers to unionise and acquire voice and visibility. Both business and the government listen more to workers when they are organised and strong,” he said.

“When unionised and united, workers are also able to make their case more effectively because they can also pool resources and undertake the analytical work they need to make their case more effectively. In the absence of strong unions and in the face of low unionisation rates, a conscientious society will look to regulation such as the Living Wage to protect workers and set a platform for economic inclusion.”

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Sunday Standard July 5 – 11

Digital copy of Sunday Standard issue of July 5 - 11, 2020.