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<font face="Verdana, Arial, Helvetica, sans-serif" size="2">Does
a minimum wage policy protect workers who are
under pressure in the ‘race to the bottom’
of labour standards in a globalising world economy?</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">Virtually
everywhere in the world, there is on-going debate
on the usefulness of minimum wage regulation.
Since structural adjustment programmes were
introduced in the 1980s to many developing countries,
minimum wage regulation has been under attack
on several grounds: proponents of the structural
adjustment programme argued that minimum wage
regulation did not help the poorest of poor
workers, i.e. those in the informal sector,
as the regulation covered only formal sector
workers; furthermore, if a minimum wage is set
at an unreasonably high level, it would have
a negative impact on employment and therefore
make its overall effect on income distribution
at best ambiguous. Particularly, as the accelerating
process of globalisation forces nation states
to compete against each other to attract more
foreign investment, minimum wage regulation
is seen as a possible barrier to more investment.
</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">Before
looking at the current debate on minimum wage
policy, it is useful to have a brief look at
the definition, aim, and history of minimum
wage regulation. </font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">A
minimum wage is a minimum level of payment established
by law for work performed. Its purpose is to
protect vulnerable low wage workers from exploitation.
It is a time-based wage that usually applies
to unskilled adults entering work for the first
time. As a minimum wage is established by a
law, it is legally enforceable. The key purpose
of a minimum wage system is social – to prevent
labour exploitation and poverty. This means
the minimum wage should provide sufficient purchasing
power to enable a worker to have a basic standard
of living. The minimum wage may also have an
economic objective – to motivate workers, enable
them to enjoy the benefits of economic growth,
and contribute to the economy.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">It
is generally considered that minimum wage regulation
was first developed in New Zealand (1896) followed
by Australia (1899), and later Britain (1909).
As the main objective of minimum wage regulation
was the elimination of ‘sweating’,
that is the payment of exceptionally low wages,
its application was usually restricted to a
limited number of particularly low-paying sectors
or to selected categories of workers, such as
home-workers, women, children and indigenous
workers judged to be particularly vulnerable.
A number of developing countries also carried
out experiments with minimum wage regulation
to protect categories of workers judged to be
particularly vulnerable. For instance, Sri Lanka’s
Minimum Wage Ordinance was promulgated in 1927,
while Argentina introduced the Home Work Act
in 1918 with a view to protecting low paid home-workers.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">However,
with the exception of a few countries, minimum
wage fixing remained a rarely used and limited
instrument of government policy in both industrialised
and developing countries before the Second World
War. Towards the end of the economic depression
of the 1930s and after the Second World War,
the number of countries adopting minimum wage
regulation grew rapidly. There was also a trend
towards extending wage protection to more and
more groups of workers and in many cases was
more universal. </font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">The
early development of minimum wage regulation
and subsequent expansion since the 1920s are
well reflected in a series of International
Labour Conventions on minimum wage regulation
by the International Labour organisation (ILO):
Minimum Wage Fixing Machinery Convention (No.
26) 1928, the Minimum Wage Fixing Machinery
(Agriculture) Convention (No. 99) 1951, and
the Minimum Wage Fixing Convention (No. 131)
1970. </font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">In
spite of impressive development of the minimum
wage system in many countries, however, it should
be noted that as with industrial relations,
both the exact nature and the scope of minimum
wage protection reflect the particular historical
and institutional development of the country
concerned. Some countries in Asia, for example
Thailand, Indonesia, China, and Japan, have
decentralised minimum wage systems, while others
like South Korea and Vietnam have a single minimum
wage for the entire country. Cambodia has minimum
wage fixing machinery only for the country’s
garment and textile sector. </font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">As
seen above, minimum wage regulation had been
adopted by more and more industrialised and
developing countries as a major social policy
tool to protect low-skilled workers by establishing
a minimum wage floor under which no payment
should be made. But the usefulness of a minimum
wage is now under question by policy-makers
and economists, as both developing and developed
countries have faced a serious under-employment
and unemployment crisis since the 1980s. The
standard argument against the minimum wage system
was based on the assumption that a minimum wage
above a certain level will cause unemployment
and therefore inadvertently work against poverty
reduction. In the specific context of informalisation
in developing economies, a minimum wage system
in the formal sector was blamed for crowding
out formal sector jobs into the informal sector.
</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">But
empirical [= practical, as opposed to theoretical]
research undertaken recently did not show a
negative effect on employment by moderate increases
in the minimum wage. Also, recently the ILO
undertook a multi-country statistical analysis
of the effect of minimum wages on poverty, employment,
and informalisation in developing countries.
The study found that if other things were equal,
the level of the minimum wage has an insignificant
effect on the level of employment. Also, the
study concluded, after analysing economic data
in Latin American countries, that changes in
the ratio between the minimum wage and the average
wage exert no significant impact on the share
of the informal economy in South and Central
America. This result supports the view that
labour market rigidity, and more specifically
low wage rigidity, is not the major factor behind
the informalisation of Latin American economies.
Regarding the effect of minimum wage on poverty,
ILO analysis found that for a constant level
of GDP per capita and average wage in manufacturing,
in one locality, a higher minimum wage is associated
with a lower national level of poverty. In sum,
the research findings strongly support the idea
that the minimum wage may bring positive results
in poverty alleviation by improving the living
conditions of workers and their families while
having no negative results in terms of employment.
Also, no evidence indicated that the level of
the minimum wage relative to the average wage
affected the size of the informal economy in
Latin America.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">The
above studies suggest that the argument against
a minimum wage system in developing countries
on the grounds of employment and poverty is
not convincing.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">Let
us examine another important argument against
minimum wage regulation which is often put forward
in the context of globalisation and competitive
edge. Often it is alleged that a high minimum
wage is responsible for weakening competitiveness
of industries. But is it really true? Take the
case of Thailand. At the peak of the Asian financial
crisis in 1997 – 1998, there was a heated debate
on the role of the minimum wage in Thailand.
One view argued that the minimum wage was one
factor responsible for falling competitiveness
of Thai industries which triggered the crisis.
The ILO conducted research to investigate relations
between wages and other economic variables.
The ILO’s research revealed that it was
not primarily the level of the minimum wage
but other macroeconomic factors such as a fixed
exchange rate and falling productivity of Thai
industries which caused falling competitiveness,
eventually leading to the economic crisis. </font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">At
the same time, however, it should be emphasised
that without developing a sound enterprise wage
structure, which encourages a cycle of skill
development and productivity enhancement, there
could be a minimum wage ‘trap’ for
both employers and workers. During the pre-crisis
period in Thailand, the ratio of minimum wage
to average wage in non-metropolitan regions
was extremely high (around 70 percent). Because
of this Thai trade union officials complained
that workers, often with several years experience
and skills, were ‘stuck’ on the minimum
wage.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">Available
evidence confirmed this to be the case. For
such workers, the minimum wage had thus drifted
from its usual intent – to provide a wage floor
for unskilled, new entrants to the labour market.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">But
there are other possible consequences. For one,
the function of the wage to motivate is disrupted
when the link between pay and performance is
weakened. While minimum wage increases might
be seen as ‘rewarding’ workers with
seniority, it remains possible that the motivation
of the wage is disturbed when there is no obvious
link between pay and performance after years
on a job. On the contrary, it is possible that
higher increases in the minimum wage than in
average wages could reduce the incentive to
improve skills. If either is true, labour productivity
could suffer. Thai employers, on the other hand,
argued the complete opposite – that generous
increases in the minimum wage had deprived them
of the ability to control their own wage structures
and to devise wage policies suited to the enterprise.
There is some evidence to support this view;
employers often abandon their own wage decisions
to the government’s annual announcement
of the minimum wage adjustment. Efforts to link
wages more closely to enterprise performance
were frustrated.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">The
example of Thailand illustrates the importance
of developing a sound enterprise wage structure
through enterprise pay negotiations and a good
human resource management policy, which should
activate a cycle of pay increases, more motivation,
skill development, and higher productivity.
Actually, when workers have no bargaining power
at enterprise level, there is a real danger
that a legal minimum wage turns into an effective
maximum wage.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">In
Cambodia for example, the majority of workers
in garments and textiles receive just a minimum
wage, which is currently US$45 per month. As
trade unions are very weak at the enterprise
level, the fragmented trade union movement tends
to concentrate efforts on increasing minimum
wages through tripartite negotiation with the
National Labour Council. It may be an inevitable,
logical choice for an emerging trade union movement
which has very weak roots in the work place.
However, it is very clear that unions should
make great efforts to improve pay bargaining
capacity at the enterprise level to achieve
settlements above the level of minimum wages.
Otherwise there is a real danger that minimum
wage effectively becomes maximum wage and union
organisations in the workplace will find it
difficult to recruit rank-and-file workers and
convince them of the value of union membership.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">This
situation may suggest that the most appropriate
role for a minimum wage is to provide a defined
floor to the wage structure to provide a ‘safety
net’ protection for the lowest income groups.
For this reason, an ILO publication suggests
that the economic impact of minimum wages should
ideally be only a slight upward pressure at
the bottom end of the wage structure, with little
effect on average wages and inflation. </font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">Of
course there is the opposite case, too. In Korea,
for example, the minimum wage accounts for only
around 30 percent of average wage and therefore
covers less than two percent of the total workforce.
At this low level of minimum wage relative to
average wage, we could say that the minimum
wage system has failed to meet its original
goal of protecting low-wage unskilled workers.
If minimum wages are too low the objective of
poverty reduction will not be achieved. People
will continue to work because they have no alternative
but the result is a society of ‘working
poor’.</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">Therefore,
minimum wage determination is a delicate issue,
which should be seen in a broader context of
interplay between market forces and collective
bargaining power at various levels of economies,
not in isolation from other forces at work.
In this regard, the fact that minimum wage fixing
through tripartite discussion – either negotiation
or consultation – is common in many countries
is important. This introduces an element of
negotiation between government, workers, and
employers in the wage setting process. Where
there is good quality information and the parties
genuinely desire a common-interest outcome,
tripartite deliberation could offer a mutually
beneficial compromise. But trade unions and
other parties to consultations in many developing
countries face a number of problems. As illustrated
above, in a number of countries where trade
unions at the workplace have very weak bargaining
power, national trade union centres tend to
concentrate excessive effort on the minimum
wage fixing process, unintentionally resulting
in further weakening trade union organisations
and collective bargaining in the workplace.
Another typical problem in least developed countries
is that there is often no reliable data on economic
variables to be taken into account for minimum
wage fixing and adjustment. Even if there are
economic data for it, trade unions often lack
the capacity to analyse them and engage in meaningful
joint discussions. Developing power and abilities
of trade unions at both workplace and national
levels is an urgent task in many countries.
</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">After
years under attack for alleged negative effect
on low-paid employment, the minimum wage regulation
seems to be back in favour as a means of providing
unskilled workers with decent living conditions.
Several factors are responsible for the renewed
interest in the minimum wage as a tool of market
policy. First, several studies in the 1990s
showed that the minimum wage had little, if
any, effect on creating unemployment. Second,
there is a new human rights approach that focuses
on the right to have decent employment. In developing
countries, policy makers are not only concerned
with the impact of the minimum wage on employment,
but also with its impact on the level of poverty.
However, trade unions in many Asian countries
face an uphill battle to win a minimum wage
system, as the globalisation process and mobility
of capital put great downward pressures on working
conditions and in particular on minimum wage
systems. This is a battle for decent work for
all working men and women, which will continue.
</font></p>
<p><font face="Verdana, Arial, Helvetica, sans-serif" size="2">——————————————–<br>
<i><font size="1">Chang-Hee Lee, Industrial
Relations Specialist, East Asia Multidisciplinary
Advisory Team, ILO, Bangkok (</font></i></font><i><font face="Verdana, Arial, Helvetica, sans-serif" size="1">Disclaimer:
This article does not necessarily represent
the official view of the International Labour
Office, for which the author is working.)
Address: Wisma MTUC,10-5, Jalan USJ 9/5T, 47620 Subang Jaya,Selangor | Tel: 03-80242953 | Fax: 03-80243225 | Email: sgmtuc@gmail.com.com