Why the fuss over minimum wages?
Across the world, the issue of minimum wages arouses great passions – and lots of specious statistical claims. Last week, Walmart in the US decided to put all those arguments to the test in what is likely to be an epic experiment that will inform us all.
Long vilified for its low wages, the US’s largest private sector employer is about to hike the hourly wages of its 500,000 lowest-paid staff from the Federal minimum of US$7.25 to US$9.00 – with a further hike to US$10 next spring. The move will add over US$1 billion to its wage bill. This sounds painful, but set against annual revenues of US$486 billion, the pain won’t be as acute as it seems.
Already, there are some in US business that are predicting that Armageddon is about to be unleashed, in particular for fast-food groups like McDonalds and Pizza Hut.
This vividly reminds me of the epic panic in Hong Kong’s business community when the government unveiled plans to introduce a minimum wage. In 2010, in the midst of the debate, our business chambers rang loud alarm bells: the British Chamber opposed a minimum wage outright; a cleverly statistical – but ultimately specious – paper from the Hong Kong General Chamber warned of a danger that a minimum hourly wage of HK$28 (the minimum eventually set in May 2011) could lift unemployment from the then 5.2 per cent to between 7 per cent and 10.5 per cent. The HKGCC paper warned that a rate of HK$33 “would be unsustainable for many businesses, especially for the labour-intensive and low-paying sectors”.
In a couple of months, the minimum wage is likely to be lifted to HK$32.50, and on best evidence around me today, Armageddon has yet to descend. And unemployment has not risen as forecast. On the contrary, in the four years since a minimum wage was set, unemployment has fallen steadily. At last check it was 3.3 per cent.
Throughout this debate, I have lost friends in the business community by arguing that we have nothing to fear in a minimum wage – and on the contrary have much to gain.
First of all, the minimum wage affects most of us hardly at all. We earn so much more than the minimum, that the discussion can often seem remote. But for those that it does affect, the difference is critical. As has been noted in the US, even at US$10 an hour, a Walmart worker with a family of four would still need to rely on government assistance to be lifted above the US’s Federal poverty line.
Second, higher wages tend to cement employee commitment, reduce staff turnover, and reduce the amount of money a company has to pay in training new recruits.
Third, and perhaps most important, higher wages lift millions of households to income levels where they can become significant consumers – bringing net benefits to large parts of our economies. An extra $100 earned by a low wage earner will all be spent: an extra $100 earned by an already-wealthy business executive will mostly be saved.
Nowhere has this lesson been most forcefully learned and applied than in China, where minimum wages have been lifted during the past 10 years by an average of around 8 per cent a year. Officials looked at the iPhones leaving Foxconn in Dongguan at an export price tag of over US$170 apiece, and a final retail price of almost US$500, and realised that China was at the mug’s end of the value chain. It was capturing for the Chinese economy less than US$7 of the value of each US$500 iPhone, at the price of keeping hundreds of thousands of migrant labourers in drab poverty, occasionally throwing themselves out of dormitory windows.
China’s leaders keen to shift from reliance on exports to domestic consumer growth, have recognised that workers need to have cash in their pockets – which can only come from higher wages. Hong Kong employers in the Pearl River Delta may have kicked and screamed, and without doubt China’s global wage competitiveness has been reduced, but the message from China’s leaders was clear: wage competitiveness has no value if it locks your people in poverty. By forcing wages higher, they have given manufacturers a stark choice: close down, or improve productivity so that higher wages can be afforded. That forces innovation, which surely must be good.
For Hong Kong too, the message should be clear. This is a high-price, high-cost economy which will never win a game based on low-wage competition. If a company depends on such low wages, it has no place in Hong Kong, and should migrate elsewhere. A higher minimum wage will do Walmart no harm. And it will do Hong Kong no harm. On the contrary, slightly more youngsters might then one day be able to afford their own home.
David Dodwell is the executive director of the Hong Kong-Apec Trade Policy Group