We need a higher National Minimum Wage in Malta (2)

The first part of this article appeared on Saturday.

In the first part, the author explained why a debate on a higher minimum wage is needed. Here he adds to the arguments in favour and suggests a way forward.

What aggravates a lot of people is that the proportion of low-paid workers has risen. In fact, Eurostat reports that, whereas in 2014 only 15.08% of all employees were considered low-paid (i.e. earning two-thirds or less of median gross hourly earnings), the percentage had increased to 15.51% by 2018. Contrast this with a reduction of just over a percentage point to 15.22% in the EU. Another fact which caught the headlines recently was that the gross minimum wage in Malta increased by just 2% in 2020, the third lowest rise in the EU, compared to some significant increases ranging between 5-12 percent in other countries.

I have often heard the claim that the relative reduction in low-paid wages is because average wages in Malta have risen a lot in the economic boom, but this is scant consolation for those who have not benefited from the same trend. It is also one reason why the At Risk of Poverty numbers have increased in absolute terms.

A report by Eurofound also revealed another dimension of the effect of low wages. The proportion of minimum wage earners who found it difficult to make ends meet in Malta ranged between 13-26 percent. It is certainly one of the lowest in the EU, compared to, say, Cyprus with a range between 52-64 percent. However, this is to a large extent because of the social assistance which lets most of the low-paid workers attenuate their financial difficulties.

And here is why we need a rise in the National Minimum Wage.

Melchior Vella (2014) found that the average wage rises less-than-proportionately than the minimum wage. Though his study suggested that a 10% increase in the minimum wage results in a 6.6% decrease if employment, he rightly pointed out that minimum wage increases also have social, consumption and labour supply effects that tend to have positive countervailing effects. Saviour Rizzo (2012) argued that the annual cost of living allowance increase has not caused a surge in wages in Malta.

Critics of minimum wage increases are vocal about their concerns, but their arguments lack a solid scientific basis. Although some studies, both national and cross-country ones, have claimed that such increases destroy jobs, the majority find otherwise, or, at worst, a neutral result.

For example, a paper by Doruk Cengiz, Arindrajit Dube, Attila Lindner, and Ben Zipperer (The Quarterly Journal of Economics, August 2019) estimated that the number of excess jobs at and slightly above the minimum wage closely matched the number of missing jobs just below the minimum wage and found no evidence for employment changes at or more than $4 above the minimum wage in 138 levels of minimum wage increases. A similar pattern obtained for low-skilled workers, suggesting labour-labour substitution is unlikely to be a factor. Moreover, they found that the level of the minimum wages that they studied – which ranged between 37% and 59% of the median wage – did not reach a point where the job losses become sizeable.

A World Bank overview (A. Kuddo, D. Robalino, and M. Weber, 2015) concluded that “although the range of estimates from the literature varies considerably, the emerging trend in the literature is that the effects of minimum wages on employment are usually small or insignificant (and in some cases positive).

This means that the critics win their day because supporters of such rises are too timid, and so are some governments.

When our economic growth has become increasingly dependent on domestic demand, it is obvious that weak confidence and spending will be a barrier to economic recovery and growth. So, suppressing wage growth especially among low-paid workers who consumer proportionately more than other better-off people, actually backfires.

We need higher wages, not lower. And minimum wage increases are especially important in a recession or low-growth scenario.

That’s why I believe that a reasonable 10% increase in the minimum wage, spread over four years would be good for business and macro-economic stability. It would help workers who need it most: the lowest paid, more likely in casual jobs, and concentrated in the sectors most impacted by COVID (like retail and hospitality). Co-incidentally, it would also help close the gender gap, as many part-time, casual and low-paid roles are undertaken by women.

“A reasonable 10% increase in the minimum wage, spread over four years would be good for business and macro-economic stability.”

Minister of Finance Clyde Caruana said last December that it was “not on” to see low-income workers’ salaries stagnate, though a month later he was quoted as saying that he could not see the introduction of a “living wage” in the foreseeable future. This may sound contradictory, but I think there is room there for an adequate adjustment in the national minimum wage in the very near future.

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