Raising the Minimum Salary Benchmark
Raising the minimum Salary is very often brought up as a “magical solution” to the local dilemma of low salaries being paid out to workers at the lower end of the ladder. Now I could understand the rational the causes humanitarian calls like those to float up every once in a while from people and members of the representative council. But seriously now, let’s put the theory down to the test.
The economy of a country is a very complicated system; once you mess around with one function of it, things will tumble down on your face. And that’s exactly what many fail to understand. Issues of unemployment or low income families can not be magically fixed by “Bonuses” given out randomly to everyone, or raising the minimum salary as per the educational qualifications of the worker and such.
A Salary (like equilibrium) is determined by the simple laws of supply and demand, where the price for the good (being the qualified worker) is matched by a price (i.e the salary). Whatever the government does to intervene with this (all in good faith, one would assume) will only be a temporary measure that will result in an impermanent phase before things go back normal.
Let’s talk examples, suppose there are seven classes of workers, ranging in skills from “highly skilled” (neurosurgeons, lawyers and such) to “unskilled” (janitors, hotel maids, me.. etc). Suppose that without minimum-wage legislation in practice the equilibrium salaries for the skill groups are as follows:
1: 3,000
2: 2,000
3: 1,000
4: 500
5: 250
6: 150
7: 100
Now, impose a minimum-wage of BD 550, what happens?
Employers of workers in skill-groups four, five, six and seven will reduce the quantity of workers until the marginal value per worker hired raises to at least BD 550. Its simple economics, if the price of a good goes up, less of that good will be consumed.
The salary for all workers below skill group 4 will be very near to the BD 550 set limit, in other words it does not matter what qualifications or experience the holder has as long as they are able to come to work every morning. While the demand will increase on workers in skill groups 3 and above therefore raising their cost, basically we are helping the rich getting richer and poor stable at a new income level.
Inflation? A study conducted in the US showed explained how since ” The last time the minimum wage was increased, restaurant menu prices increased 2.6 percent in 1997 compared with a 1.7 percent increase in the consumer price index. Inflation in the service sector, in which most minimum wage workers are employed, rose 2.8 percent in 1997—1.1 percent higher than the overall inflation rate.” (Source)
Bottom Line: Increasing the minimum salary will only be a temporary solution against families and individuals that are being affected by inflation, but this will only be done by dropping employment opportunities and decreasing the quality of the work experience for those very workers affected – and is hardly a reason to endorse the minimum salary legislation and call for it to be enforced.
Hi emoodz,
I unfortunately am going to have to disagree with you on this post. Yes unfortunately in this day and age of global-capitalism everything, including wages and labour quantities, are determined by supply and demand. However, labour is a very specific type of commodity unlike any other. It is people we are talking about here, and people require a certain minimum amount of income in order to function and provide “labour” adequately. Leaving labour to the vagaries of the market is in my opinion not only immoral (but this can disregarded since it is only an ethical opinion which you may disagree with), but it is actually inefficient for the economy.
This is particularly the situation in a country like Bahrain, which does not fit your usual economics model that they teach at undergrad (but then again no economy really fits those misguided models). Bahrain is a rentaire state, where the main source of income in the economy is revenue accruing to the government from natural resources which it then distributes as it sees fit. It is not your classical perfect competition situation. Perfect competition does approximately apply however in one sector, that of expat labourers (and where even here wages are not determined primarily by skill (although that plays a signficant part) but primarily by the country you come from and the reserve army of labour and standards of living predominant in that country). This has severe effects particularly on the low income jobs, where the expat community predominate. Bahrainis can in no way compete with the exapt force in jobs such as janitors, waiters, builders etc because they have to compete with wages determined far away in the subcontinent. You cannot expect a Bahraini to survive and support his family on 50 bd a month and working 12 hours a day ever day unless you pack them all in labour camps with ten people to a room and where their families back home can make a decent earning on whatever is left of his savings (which in Bahrain is impossible). If this model was extended to all professions, even the protected “more skilled ones”, then even doctors in Bahrainwould have to survive on 200 bd a month since there are doctors all over the world willing to come over for that sort of money. Basically Bahrainis would not be able to compete with labour from e.g. from India in any sector, even the government one (if we assume it is completely opened to global labour market forces) since there are literally millions of people who’d happily come and work in Bahrain for a fraction of the cost and would give double the work. This is why most advanced countries in the world (with the slight exception of the U.S.) have tight labour controls and also provide their workers with generous unemployment benefits, minimum wages, etc. i.e. what is dubbed a decent “social contract”.
Of course putting in a minimum wage while also allowing free expat labour is not going to help much either, which is one of the reasons why Bahrain needs to seriously start thinking of getting rid of its reliance on foreign labour. Of course this cannot be done all in one go due to the dire situation we are in (inflation will suddenly spiral to record levels, there will be a contraction etc). But we need to gradually to adjust the economy from its reliance on foreigners for everything or we will be facing severe trouble (even worse than the current situation) very soon. Our economy is not sustainable as it is.
If we assume that the whole labour force is only made up of Bahrainis then minimum wages and unemployment benefits become vital necessities. Even the predominant modern neo-liberal economics (which unfortunately treats economics like a science of utilities, preference function, and nash equilibrium devoid of hisotrical conditions and social consequences) acknowledge nowadays the vitality of some form of these institutions to combat what they dub “market failures”. Minimum wages and unemployment benefits are crucial to ensure the smooth functioning of the labour market and to ensure, for example, that there is an adequate redistribution of resources, “efficiency wages”, and to minimize mismatch of jobs (where people instead of taking up any job are able to wait and choose a job that fits them more). Of course these institutions have to be designed in order to minimize “laziness” and “efficiency” losses, such as e.g. making sure that those who get unemployment benefit have to go to training courses or be active in actually searching for jobs. Of course capitalists and business owners would love to have the cheapest and weakest (bargaining position wise) labour possible, but I’d like to think capitalists are not the only concern in society.
This is of course to say nothing of the social, political and historical consequences of not having adequate social safety nets (e.g. people displacement, income insecurity, strikes, revolts, increasing income inequality in society and all the ills that come with that) but unfortunately most economists nowadays know zilch about this let alone discuss it.
Alright I think I’ve ranted too much so I’ll shut up. Great recent posts by the way. Keep up the good work.
p.s. if you are interested in reading a great analysis of the problems and vagaries with the “laissez faire” and “free market” then I’d recommend the classic “The Great Transformation” by Karl Polanyi. An awesome book.
I didn’t really want to talk about the “perfect competition” scenario here; as I totally agree with you with what you said about it not being applicable anywhere around the world, there is always this “safety valve” imposed by the government that is used to deter if not stop such settings; be it the social security number in the states or the work permit in the UK. Let’s not go there anyway, since the minimum wage legislation will only be enforced on Bahraini nationals.
This is exactly our problem, just because cheap expat labors are getting 50 bd a month does not necessarily make it the equilibrium point (and mind me for using economical lingo again), in other words, the 50 dinars salary was only put into practice because there is in fact a huge flow of laborers who are willing to work for such ridiculously low amounts.
On a separate note, let’s be fair here. The 50 dinar workers are mostly those in the construction industry, I have personally seen a huge change in the Bahraini mentality towards jobs like janitors, hotel servants, waiters and nurses. I am not saying the expat domination has completely disappeared, but things are drastically changing and view the community has towards such low skilled jobs has changed.
Most foreign investment flows into Bahrain goes to sectors like Banking, Finance, Real Estate and Communication, and those do not rely on low cost labor.
I will have to disagree with you on this one; I am believer of a free economy (and yes, I admit being brainwashed by American propaganda) but seriously now, only the employer should have the right to decide what worker and of what nationality does he require. You see, if we truly eliminate the financial and cultural obstructions currently in place and level the playing field to a level where everyone is equal in employment opportunities only then will we have a stable labor market.
It is very hard to lower the international standards down to the level of the typical Bahraini, but is much easier to raise the Bahraini worker to the international standards (Bearing in mind the “safety valve” I talked about in the beginning of my comment).
You see, with a mentality like the one that runs our government (may god preserve them *wink*) that everything should be handled by a royal decree, a law and such will only make things worse. Such measures will surely decrease unemployment perhaps even significantly, but as the unemployment challange grows, it will require even more forceful intervention to lower it even further down. Laws like those will breed a new nido generation that believes that jobs are reserved for them (and if not they better damn be) which in turn makes them grow less of a need to perform well to get or maintain those jobs, even employers now tend to keep those poor performing Bahrainis just because they are Bahrainis to balance out the Bahraini to Expats ratio as set by the ministry of labor, because of such laws.
Another thing that is worth mentioning while were at this, is that one thing that makes the expats more attractive than the Bahraini worker is their tie to the employer (by visa and work permit) he/she is only allowed to work for that sole employer while in the country in that visa, when the Bahraini is practically free to move at any time. I don’t know how this can be solved, but something should be done to stop this.
My point? Is that we need to enforce some sort of financial obstacle to deter (and not stop) the inflow of expats, proceeds of such should be put in a fund that is used to educate and sharpen the skills of the Bahraini worker up to the international standards.
Ok, I have this feeling that I have talked too much without focusing on one thing. Anyway, let me get back to my minimum wage argument:
- It is only expected that businesses adapt to mandatory wage increase by turning to automation or reducing service to their customers (away from the economical models) , just look at the proliferation of the ATMs and the self-checkout lanes at grocery stores things like those are all designed with eliminating labor cost in mind.
- Increasing the minimum wage will also have a negative effect on highschool students, why would they continue their degrees to university level if they can just quit at highschool and get the minimum wage that was put their to guarantee them a decent living standards, bearing in mind that getting the university degree will not necessarily mean them getting a higher pay, especially at entry level.
- With a larger pool of applicants, competition is stiffer; low skilled workers will have a more difficult time getting those job skills required for the economical well being.
The whole point of this post is to note that reforms do not have to be carried out by laws and regulations, if we want to deter unemployment that should be done the proper ways of increasing investments, attracting foreign companies, banks and capital. Other than that, all those reforms are doomed to fail, sooner or later that is.
I much appreciate your contribution to the blog nido; thank for your comment, your book suggestion I already added to my amazon wish list
Good day ahead!
Should take into consideration the movements by unions in different industries, that might have its effect …
for example : the demands of the union in delmon poultry ..
I can see this turning into a non-ending discussion where we each keep replying without ever convincing the other. Let’s see how long it lasts!
I don’t think the main problem is the view of people to such jobs, even though unfortunately there is a stigma attached to them. The main problem is the low wages that prevail in these jobs because of competition from expat workers. In fact the stigma attached to these jobs is a result of these jobs being seen as only fit for expat workers and not dignified enough for Bahrainis. If restrictions were placed on expat workers and, for example (and I’m just picking numbers here), builders started being paid a minimum of 300bd per month I bet you’d find a lot of Bahrainis who’ll start up taking those jobs. Before the oil boom took place Bahrainis did the job of builders, municipality cleaners, etc. They are necessary jobs in a society, but when you have to compete with BD 50 labourers that work for 12 hours a day these jobs are no longer worthwhile. (Side: indeed I was thinking of the construction industry when I said BD 50, but the construction industry is the biggest non-public employer in Bahrain! Although most investment flows into the banking ).
Alright several points in here:
1. believer in free economy: I gathered as much from your comments. This is of course a side issue but I’d be interested in knowing what you imply by that Because if free economy means “laissez faire” then it’s very hard to find many examples of it in the real world. Even the U.S. is a heavily regulated economy (anti-monopoly laws, stock market regulation, etc etc) and has serious government intervention (e.g. New Deal under Roosevelt, the Interstate highway system under Eisenhour, etc etc). Almost all countries that have recently followed IMF recipes (of free economy) have experienced disastrous consequences. Even the IMF now acknowledges its disastrous policies in places such as e.g. Russia, Latin America, etc and no longer espouses a strong version of free economy.
2. only employers can decide who and what nationality to hire: Come on man. There is no country in the world, with the exception of few cases (with the only example I can think of being the gulf because of its own peculiar conditions and even here it is heavily regulated) allows for the free flow of international labour. It goes against the essence of of what a nation state is and its fuction of providing a decent life for its citizens. No government would ever contemplate freeing labour flows in it completely or that would be absolute political suicide! This is particularly the case with “low skilled labour”, where minimum wage laws become relevant. It would mean having to compete with the global reserve army of labour, where you’d have literally millions willing to immigrate from China and India to work for a fraction of what is demanded by the local labour force in developed countries. This is why pretty much every country has severe restrictions on labour flows, particularly on low skilled labour.
The reason in Bahrain companies hire idle Bahrainis just to satisfy government set quotas is because it makes so much sense cost-wise to hire low-paid expats.Unless you put restrictions on bringing in low-paid expats companies will see no reason to hire Bahrainis for these jobs.
I assume by international standards you are here taking about “skills”, “productivity”, “qualification” etc. I disagree on this point and don’t think it is what matters here in low paid jobs. The reason companies hire low paid expat workers in low skilled jobs is not because they are more skilled than Bahrainis, even though that might be the case. The main reason is because these expat workers will settle for a lower wage, harsher working conditions (measured in such things as labour rights and hours of work required) and come from societies where the required standard of living (measured in income) is so much lower. After all, theoretically a Bahraini can do the job of e.g. a janitor on an hour per hour basis just as well as an expat. It is not because an expat cleans so much betteron an hourly basis than a Bahraini that they are hired. It’s more because their hourly wage is so much lower and they have much less labour rights. It is not that they are so much more skilled at cleaning. After all, if it was based on skill, then economic theory would tell you that the more skilled worker should earn more and not less!
To take a hypothetical scenario. In the UK janitors are paid the minimum wage of roughly 5 pounds an hour (rougly 3 bd). If you suddenly allow e.g. workers of the subcontinent to work to emigrate to work as janitors would settle for 0.5 bd an hour, firms will start hiring them not because they are more skilled but because their wages are so much lower. Does this mean the UK (or any other developed country for that matter) should lower its wages to those levels? Try convincing the British government or people of that!
Of course when one looks at middle-high skilled labour (e.g. certain professions that are not found in abundance between Bahrainis such as hydrolic engineers, chefs etc) it’s a different scenario, but this is not very relevant here since we are dealing with minimum wages that apply almost exclusively to low skilled low paid jobs.
Hence if one allows free international competition in low skilled jobs what is relevant is not “” lowering the international standards down to the level of the typical Bahraini, but is much easier to raise the Bahraini worker to the international standards.” A more accurate description of what happens is ” lowering bahraini wages and living standards down to the level of your typical low paid expat”, which will be disastrous! You will not be competing with expat labours on the skill frontier (although there is a bit of that), but you will be competing with them on the living conditions and wage levels frontier. Indeed no serious popularly elected government would allow such a thing, as it would be political suicide and goes against the essence of why people elect governments (betterment of standards of living)! Of course capitalists would love this as it would considerably reduce their costs but the vast majority of the labouring population in the low end sector would have to lower their wages and living standards to compete with cheap labour exporting places such as India and China!
A good example to illustrate this is what happened in the EU with the entrance of former Soviet countries to the Union. In the UK before their entrance jobs such as builders were exclusively british. Why? because there were labour restrictions on foreigners. Once entry was allowed lots of e.g. Polish workers have migrated to the UK to take up these jobs since they pay so well (and remember in the UK minimum wages are in place to make sure wages are not driven down in such industries by the excess resultant supply and to make sure local workers are not completely driven out). And these former ex-Soviet countries have much higher standards of living than countries such as India. Imagine what would happen if there were no minimum wages and free flow of labour was allowed from countries such as India into these low skilled jobs!
I can see an argument being made for free international labour migration based on ethical judgements and the hypocricy of developed countries, where they force low paid countries to open up their markets to their products and workers but not vice verca. Aside from teh fact that this is a moral and not an economic argument, no rich country is willing to drive down its workers’ standard of living to those that are poorest in the world.
I don’t see a particular problem with this. Technology and efficiency advances; That is a good thing. Higher levels of technical innovation and capital levels, although it can cause unemployment in the short run, raises the return to labour and wages. It is vehicle for progress and growth in the economy. Of course temporary measures have to be put in to lessen their impact in the short run, but this is hardly an argument to stop using new technology (unless wants to start espousing Luddism).
University education, talking from an economic theory point of view, is not that relevant when considering low sector jobs where the minimum wage is relevant. In fact economic theory would tell you that high levels of university education is inefficient for low end jobs. You don’t need a university degree to be a bus driver or waiter (you need training courses in the job but that’s a different matter and those are generally done in conjunction with employers themselves). Now I personally believe everyone has a right to a university education, but this is not due to economic arguments but to my belief that education is necessary for self development, even though it makes no sense from an economic perspective (when considering low paid jobs low sector jobs).
Of course university education is necessary when considering high skilled jobs but that is a different story since minimum wages do not apply in those areas anyway.
I’m not sure what you mean by this point. Do you mean that because of more people dropping out of university (the point you elaborated before this one) that there will be increased competition in the low end sector which will make it more difficult for these people? I doubt this is that relevant. The main competition Bahrainis face in the low end sector is from expat workers who receive such low paid wages. If you eliminate the expat workers and institute some sort of minimum wage in low paid jobs then you have alreadly eliminated by far the biggest source of competition and these jobs will become so much more attractive to Bahrainis.
Of course it has to be kept in mind when we are talking here about minimum wages we are not taking about ridiculously high levels. We are just taking about levels that guarantee the ability to have a minimum decent standard of living. Allowing free competition with expats (who are willing to take 50-100 dinars, are willing to settle for squalid living conditions, and who require much less savings to support their families back home because life costs so much less over there than in Bahrain) will not guarantee this minimum. Who in Bahrain can live a decent (and by decent I simply mean having a living quarter, being able to eat, and pay your bills) on a 100 BD a month (which is an attractive salary for expats on most low paid jobs)? It is virtually impossible.
Alright, I think I’ve blabbered on enough!
This will be a good read over the weekend, I shall return!
Hi Nido,
Great post and a wonderfully presented argument.
Nevertheless, I feel you strayed away from the essence of the faults of a minimum wage. Your second argument focused solely on the effect of / from low skilled jobs / labourers.
You miss an important point, which in a simple context is that the enforcement of a minimum wage will not only effect that particular level of employment in the economy, but all the way up the corporate ladder. I’ll give you an example from a social perspective, which ultimately impacts on the economic one.
Social perspective
I am earning BD250, which is BD70 higher than the minimum wage of BD180. I am not happy about it, but at least my job is respectable and I am not serving tea and coffee to the stupid bosses all day. I heard that the minimum wage increased to BD250. I demand a wage rise, or I’d quit, how could my job be equivalent to that of a janitor? furthermore, why did the janitor earn a 128% pay rise?
Economic perspective
Mr Janitor who used to earn only BD180, who has six mouths to feed (a wife, himself and 4 children), decides to give them a treat this month, instead of the shawarmas on the weekend, he’d take them to McDonald’s. Or instead of fish everyday for lunch, its meat. Instead of bread from el Khabaz he’d go for sliced bread, or instead of eating sweet samoosas and baqlawa, he’d buy more flower for the wife to make home-baked cakes.
You catch the drift, luxuries become necessities. Standard of living rises, if the economy is able to sustain it, otherwise, which is the case in Bahrain, its high time inflation.
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- Mohammed AlMaskati
East Riffa, Bahrain
I support a ONE Bahrain!
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