Retrograde and selfish

Although the rise in inflation over the last few years may suggest caution in raising the minimum wage, we do have the necessary margin to go beyond the current level and protect, at least partially, the living standard of poor workers and their families.

“Naïve” and “suicidal”.  That is how the Malta Chamber of Commerce described the potential rise in the national minimum wage being proposed by the Government and endorsed by the majority of the other social partners in the Low Wage Commission, set up a year ago as a follow-up to the national agreement reached between the social partners in 2017.

I feel so strongly about this that I am not going to reserve my own description of the Chamber’s attitude to the conclusion of this opinion piece.  And my adjectives to match the Chamber’s attitude are “retrograde” and “selfish”.  And for good reason, as I will explain.

Minimum wage levels in the EU

For background, the current minimum wage is €835 per month for an 18-year-old and over.   For starters, I think calling such a sum a minimum wage is a misnomer – I would call it a subsistence rate.

Let’s compare minimum wage levels in the EU, shall we?  In February, Euronews reported that, according to Eurostat, minimum wages in July 2022 ranged between €363 in Bulgaria and €2,313 in Luxembourg.  Malta’s level then was €792.  Ok, it was the second-best level out of the 12 countries that joined the EU in 2005, though not much higher than their average.

Now a host of international economic institutions, including the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), consider that a decent minimum wage should not be lower than 60 per cent of the median wage level in any country.  Gross minimum-wage levels expressed as a share of median wages (the so-called ‘Kaitz ratios’) vary significantly across the EU.  In 2020 they ranged from 43.9 per cent in the Czech Republic to 65.9 per cent in Bulgaria.  In Malta, the ratio was 53.6 per cent. One might say it is not too bad, but it is still below the 60 per cent threshold.

The share of workers covered by a minimum wage

The share of workers covered by a minimum wage also varies significantly across countries.  For instance, in Belgium, less than 1 per cent of workers are paid at the minimum wage.  By contrast, in France, it is some 12.5 per cent.  Recently, Finance Minister Clyde Caruana said that, in Malta, some 2,300 people received the minimum wage in 2022 – that’s 0.8 per cent of the number of employed persons in the last quarter of 2022.

The figure given by Minister Caruana, however, jars with what he said in Parliament recently: that in 2022 some 20,000 non-EU nationals working full-time in Malta had earnings equivalent to the minimum wage. Presumably, therefore, the number of 2,400 mentioned in the preceding paragraph were just the Maltese workers on that wage.

According to Eurostat, the proportion of workers (excluding apprentices) earning low wages (not just the minimum wage) in Malta in 2018 in firms employing more than 10 people, was 15.5 per cent, close to the EU average.  Assuming the percentage has remained the same, in 2023 this would mean 38,845 workers and that would make sense if the non-EU nationals mentioned by the Finance Minister are included.  Mind you, that percentage would probably be higher if one were to extend the calculation to firms employing less than 10 people.

Looking at the distribution of employees in the various sectors of the economy during the 2nd quarter of 2023, one finds that just under 71 per cent of employees are earning the median wage or less.  They are those employed in the sectors shown in the first five columns of the chart.  The least paid are those in the Trade, Transport, Hotel accommodation, and food sectors, with 71 per cent of the median, while the best paid are those in the financial and insurance sector with 128 per cent of the median.

Raising the minimum wage

Although the rise in inflation over the last few years may suggest caution in raising the minimum wage, we do have the necessary margin to go beyond the current level and protect, at least partially, the living standard of poor workers and their families.  It is not right that statutory minimum wages do not adjust regularly in relation to median wages.

Of course, a minimum wage cannot be used to eliminate poverty on its own, but it is a useful policy toolkit to address poverty.  This is apart from the fact that there is something very wrong with an economic system in which someone who works hard is still unable to provide an adequate standard of living for themselves and their families.

The standard objection to raising the minimum wage in many countries is that, if the minimum wage is set too high or increased too much, this may have an unexpectedly large impact on the labour costs that employers must pay.  This, in turn, could trigger price inflation, hurt exports, and reduce the level of employment.  Wages that are too low, by contrast, constrain domestic household consumption.

From a macro-economic perspective, wages that increase roughly at the rate of medium-term productivity growth plus the ECB’s target rate of inflation should guarantee price stability, ensuring that wage developments do not cause deflation or excessive inflation.

Employers’ thinking is out of date

The Maltese employers’ thinking on this is some 30 years out of date.  Then, most economists would have said that any level of the minimum wage inevitably costs jobs as they believed that it is a basic principle of economics that the demand for labour always falls as wages rise.  Today, many – though not all – economists think that this view is over-simplistic and that appropriate levels of the minimum wage need not cause job losses.

The empirical evidence from various cross-country studies does not always confirm the negative effect that a rise in the minimum wage is predicted to have in theory, although small effects are prevalent in the literature.  Neither are profits significantly affected.  But there is plenty of empirical evidence that minimum wage adjustments have an effect on prices.  The overall reading of the evidence is that minimum wage rises increase the wages of the poor, do not destroy too many jobs, and do not rise prices by too much.  In other words, firms respond to higher wages not by reducing production and employment, but by raising prices.

Various other studies have posited that minimum wage increases for those at the bottom of the income spectrum increase community-level economic activity and support small businesses; reduce the amount by which taxpayers subsidise corporations for the low wages they pay; and reduce the pay inequalities for women that depress overall economic growth.

For example, the Federal Reserve of Chicago determined that low-wage worker households spent an additional $2,800 in the year after a $1-per-hour increase in the minimum wage, while the Economic Policy Institute found that increasing the minimum wage by $1.55 per hour over three years would generate approximately 100,000 new jobs.   These findings confirm the conclusions of the seminal work on the subject by David Card and Alan Krueger in 1994.

Just three years ago, prominent economists in the US and the UK published an analysis of 138 US state-level minimum wage changes since 1979, finding that the overall number of low-wage jobs remained unchanged after the increase and that low-wage workers who were already earning above the minimum also saw modest wage increases.  In fact, in 2014, the 13 states concerned that raised their minimum wages added jobs at a faster rate than the states that did not.  Other research has demonstrated that minimum wage increases have a particularly strong effect on households’ real spending on food, particularly good prepared away from home.  This category of increased spending would be quite beneficial to the restaurant sector.

A ground-breaking 2014 report by the Berkeley economists Michael Reich and Rachel West found that raising the minimum wage in the USA would reduce social protection spending by 30 cents for every $1 increase in family earnings.  So, a minimum wage increase that lifts many families out of poverty should reduce public expenditure on social assistance. 

Moreover, minimum wage adjustments should always be coordinated with tax and benefits provisions.  This is key to ensure that increases in the headline value of the minimum wage translate into higher take-home pay while limiting the rise in labour costs for employers and keeping the cost for the public budget in check.

The way forward

So, it is time to consider that the minimum wage be used as a reference for the adjustment of other policy tools, such as social minima, income tax brackets, and benefit income eligibility thresholds. It is also strongly advisable that adjustments in the minimum wage should make reference to labour productivity (and here I sympathise with the positions of the Malta Chamber of Commerce and the Employers’ Association), both to ensure that workers receive a fair share of the fruits of progress but also to ensure that adjustments are in line with average productivity growth.

Photo credit: Pixabay

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