Economic Insights:The Minimum Wage

The political leader of the main opposition party in Dominica has raised the issue of increasing the minimum wage when his party takes the reins of government. In our continued effort to enlighten the public on economic policy issues, we look at the minimum wage in this latest edition of Economic Insights. The first part deals with the legal provision for a minimum wage. The second part focuses on the effectiveness of a minimum wage as a tool for achieving public policy objectives by considering the arguments for and against it.

What is the Minimum Wage

The minimum wage is the lowest wage that the law requires an employer pay to an employee. In the United States of America, for example, the Fair Labour Standards Act of 1938 requires a federal minimum wage. Since 24 July 2009, the minimum hourly rate has been at US$7.25. State and municipal laws can also set a minimum wage but this cannot be less than the federal minimum. Currently, twenty-nine states have a higher minimum rate than the federal minimum. States such as California, Massachusetts and Washington have prescribed US$12 per hour as the minimum. The District of Columbia (not a state) offers US$14, almost double the federal rate.

Of course, the law makes exceptions. The minimum hourly wage is US$2.13 for persons whose income is largely earned through tips. Persons under the age of twenty may be paid US$4.25 for the first ninety calendar days of employment unless a higher State maximum exists. Different rates apply for American territories. American Samoa, for example, has industry-specific minimum wage rates. These rates are to be increased by US$0.40 per hour every three years until they reach the federal minimum.

In Dominica, the Labour Standards (Minimum Wage) Order, a subsidiary legislation under Section 5 of the Labour Standards Act (Chapter 89:05), prescribes minimum rates for certain categories of work rather than an across-the-board minimum for the entire economy. These are shown in the Table below.

The purchasing power of these pay rates (or their real value), which came into effect on 1 June 2008, is eroded over time by inflation. The general price level of consumer goods and services rose by 6.4 per cent between 2009 and 2016 (relative to January 2001). The inflation-adjusted rates (the real values) are shown in the third column in the table.

Nominal and Real Value of Minimum Wage Rates in Dominica

Listed below-Occupation: Nominal Rate per hour (EC$):Real Value of Rate per hour in 2016 Prices (EC$)

Agricultural and other unskilled workers 4.00 3.36

Daily Paid (factory and tourism) workers 4.50 4.23

Juveniles/trainees 3.60 3.38

Cashiers/receptionists 5.50 5.17

Sales persons/cashiers 5.50 5.17

Shop Assistants 4.50 4,23

Home Assistants (with meals) 125.00 per week 117.52 per week

Home Assistants (without meals) 143.75 per week 135.15 per week

Home Assistants (living in) 142.50 per week 133.98 per week

The Dominica legislation provides for one exception. The Labour Commissioner can authorise the employment of handicapped persons at a wage lower than the prescribed minimum rate if the Commissioner is satisfied that it is in the best interest of the handicapped person to be so employed.

In 2004, an occupational wage survey for Dominica was conducted. Using the statistical findings of the survey, an analysis found that the actual wage rates paid to the majority of workers in each occupational category was more than the inflation-indexed hourly minimum wage rates that obtained at the time. (These rates were set in 1989). Indexation means increasing the nominal wages by the rate of inflation. (The author is not aware that a subsequent wage survey has been done). Indexing the minimum wage rates will maintain the purchasing power of the wages of workers.

It is important to note that a minimum wage order does not mean that an employee being paid a wage rate higher than the new minimum rate at the time of the promulgation of the order will be made worse off. Laws protect the employee from the loss of any rights or benefits he may have prior to the changes to the minimum wage. The Labour Standards Act of Dominica in Section 4(2) states "…nothing in this Act shall be construed as affecting any rights or benefits [the employee] may have or obtain under any law, custom, contract or arrangement that are more favourable to him than his rights or benefits under this Act."

A minimum wage can also be set by a policy decision of the government. In Guyana, whereas the minimum wage in the private sector is stipulated by law, the government has taken a Cabinet decision to establish a minimum remuneration level for the public sector.

The Arguments For and Against a Minimum Wage

The legal mandate for a minimum wage provides protection for low-skilled and unskilled workers, who are often the poorest and most vulnerable in society, against exploitation of their labour. The minimum wage increases consumption by putting more money in the hands of low-income workers, which in turn benefits small businesses and other suppliers of goods and services.

The level of the wage rate is typically set at a level that would allow the worker to meet his or her subsistence needs. However, there are calls in some countries such as the United States for an in increase in the minimum wage to a living wage. It is argued that the former is inadequate to permit a decent life. In fact, minimum wage earners may have to depend on government welfare programmes (such as Medicaid and housing assistance) to supplement their incomes to make ends meet. A living wage is the minimum income necessary for a worker to afford a basic decent standard of living. Senator Bernie Sanders, who is currently seeking to be the nominee of the Democratic Party for the presidency of the USA, is an advocate for a living wage of US$15 per hour. In October 2018, Amazon, the largest online retailer in the world, increased its minimum wage to US$15 an hour to provide employees with a living wage. Target, another retailer, plans to raise its starting rate to $15 by 2020.

On the matter of a living wage in the Dominican context, it is to be noted that an unskilled worker who is paid the minimum hourly wage of EC$4 is earning only about one dollar more than the average hourly wage of someone who is living at the poverty threshold, assuming a 40-hour working week. (The 2008/2009 poverty assessment established that a person is poor if his annual consumption expenditure is EC$6230 or less. The figure is used as a proxy for income in this article). This suggests a high vulnerability to falling into poverty.

An oft-repeated criticism of a minimum wage is that it excludes people who are willing to accept lower wage rates from the labour market, and in this way increases unemployment especially for young and unskilled persons. It is also said that it hampers firms in reducing wage costs during economic downturns. Unable to reduce their wage rates below the legal minimum rate, firms may be forced to cut back on the hours of work of their employees. There are studies that show a positive correlation between a minimum wage and unemployment. On the other hand, there are other studies that show little or no negative effect on employment and hours worked. The deciding factor seems to be the size of the increase in the minimum wage. In an article titled The Logical Floor, the 14 December 2013 issue of The Economist magazine concluded: "A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs…High minimum wages, however, particularly in rigid labour markets, do appear to hit employment".

It has also been argued that there are more effective alternatives to alleviating poverty than the minimum wage. These include:

• A basic income: the government guarantees each citizen or particular segments of the population (such as those living below the poverty line) a minimum income to cover basic living cost. According to the argument, the basic income, if it is based on a broad tax base, would be more economically efficient as the minimum wage is in effect a high marginal tax on employers. However, the amount that is given may not be enough to make a real difference in the lives of the poor. There is also the concern that the 'free money' may discourage persons from looking for a job or acquiring skills, but this may not be an actual outcome or result. An experiment conducted in 2017 and 2018 in Finland involving the payment of a basic income to 2000 unemployed persons (the target group) found that the recipients were just as willing to search for work as those who were not given a payment (referred to as the control group). Empirical research work on the effectiveness (or appeal) of basic income is ongoing.

• Refundable tax credit delivers larger monetary benefits to poor workers than an increase in the minimum wage and at a lower cost to society. A simple illustration of how it works: a low-income earner owes the tax authority $100 in income tax. He is entitled to a refundable tax credit of $200, according to the law. What happens? The tax authority reduces the tax liability to zero by deducting it from the credit. The government returns the difference of $100 ($200 minus $100) to the worker. The tax credit is subject to qualifying criteria such as specified levels of earnings and the number of dependents in the household.

• Wage subsidy: government pays a percentage of the employee's wages for an initial employment period. The subsidy can be applied on a sliding scale whereby the amount paid would decline and eventually be phased out as the wage increases, starting with the highest subsidy for the lowest wage. This does not seem to be a feature of Dominica's National Employment Programme (NEP).

• Education and Training: Low-skilled minimum wage earners can be transitioned into higher-valued jobs through technical and vocational training programmes such as apprenticeships.