EKIP– Expert Club for Economics and Politics A Different Opinion
The minimum wage (MW) has been an extremely hot topic lately. After yet another increase in the minimum wage threshold to 380 leva at the beginning of the month, we recently learned that a draft of the Council of Ministers proposes that the minimum wage level be fixed between 35% and 55% of the average. We often hear complaints from various circles, usually located on the left side of the political spectrum, that the minimum wage is very low, not enough for a “normal” standard of living (whatever that means) and therefore it should be increased. People who defend such positions usually do not provide serious economic arguments to support their views, but rely on statistical studies, often taken out of context and misinterpreted. Most individuals without an economic education naturally cannot delve deeper into the topic of the minimum wage and its effects on the economy, and this is completely understandable. First, because it is a rather emotional topic, and second, because they often do not have the necessary knowledge.
That is why in this and the next article we will examine what economic theory can tell us about the potential effects of imposing a minimum wage and we will support our thesis with some recent research on the topic. The main goal is to clarify how the minimum wage affects the balance of labor supply and demand and how its direct effects on certain sectors of the economy subsequently spill over into indirect ones in others.
What happens when a minimum wage is introduced?
Basic economic logic tells us that when the price of a good or service increases, demand falls while supply increases, and vice versa – this is the fundamental economic law of supply and demand. Given this law, wages are de facto the price of someone’s labor, and their magnitude affects the supply and demand for labor, as is the case with all other goods and services on the market. The price of labor (wage) of a worker depends primarily on 1) the productivity of his labor and 2) competition in the market. Given all this, what will happen if the state decides to impose or increase an already existing minimum wage threshold?
First, we should note that in order to have any effect on the labor market, a given minimum wage threshold must always be higher than the market wage (MW). If the MW is lower than or equal to the already established MW, then it makes no sense, because the minimum threshold in question is already covered by the market anyway, without any regulatory intervention.
The minimum wage against young and low-skilled workers
However, when the minimum wage is higher than the market wage, it automatically puts the labor market in imbalance and leads to an increase in the unemployment rate. Taking into account the laws of supply and demand, it is clear that the introduction of a minimum wage that is higher than the market wage causes an increase in the supply of services (i.e., labor) by workers and a decrease in the demand for workers by employers. This is one of the reasons why, when a minimum wage is higher than the market wage, the number of unemployed people – those people who are looking for work at the wage level in question but cannot find it – increases. Therefore, the minimum wage hurts low-skilled and inexperienced workers the most.
The reduced demand for labor by employers may also lead to layoffs of already employed employees. A higher minimum wage automatically means a higher price of labor and, accordingly, higher labor costs for those employers who have so far paid their workers wages lower than the new minimum threshold. If employers, in order to cope with the increased costs, decide to lay off labor, this will hit low-skilled and inexperienced workers the hardest; i.e. precisely the employees whom the minimum wage is supposed to help the most.
This is quite natural, because for this type of work, the remuneration tends to be low (around or below the minimum threshold) and usually does not require serious experience or qualifications. Very often, workers who are engaged in this type of work are young people at the beginning of their careers, who precisely because of the lack of experience and sufficient knowledge receive such low salaries. An increase in the minimum wage can completely sabotage the start of their careers and subsequently condemn them to permanent unemployment.
Every employer takes a risk by hiring inexperienced and low-skilled workers because he does not know what to expect from them. For this reason, the more expensive their labor is, the riskier their employment is, because the potential losses are correspondingly higher. Therefore, it is precisely these employees who will be the first to be laid off in the event of an increase in labor costs for a given enterprise. It is much better for a worker to be initially hired at a low wage with the possibility of a future increase if his productivity justifies it, than to be overworked or not hired at all because the salary is too high to justify the risk that the employer is taking. At the beginning of the month, the Institute for Market Economics published a study that clearly showed that in recent years in Bulgaria "after each increase in the minimum wage by 100 leva, the employment rate among people with primary or lower education has fallen by 1.4 percentage points, which according to data for 2014 means a loss of 24,520 jobs."
The minimum wage and the grey sector
The loss of all these jobs caused by the increase in the minimum wage also leads to the growth of the shadow economy. It is very likely that some of the people who lost their jobs, desperate for a job in the “light”, will turn to the shadow economy. A study by the German Institute for Applied Economic Research earlier this year showed that the introduction of a national minimum wage in Germany will lead to the stabilization of the share of the shadow economy, and it is possible that it will even start to grow in the future. Since the shadow economy operates outside the regulatory framework, it is clear that companies in it can hire workers for wages below the minimum. But in addition, the lack of regulations also means lower costs overall, which means that in some cases work in the shadow sector may even be better paid than in the “light”. The irony in Bulgaria is that recently there has been talk about how raising the minimum wage is one of the best methods for combating the gray sector (especially by the Minister of Labor Ivailo Kalfin), while in reality the effect is rather the opposite.
So far, we have examined the most direct effects of the introduction or increase of the minimum wage on the labor market. As it became clear, the sectors of the economy where wages are low and employment among low-skilled and inexperienced personnel is directly affected, most often young people suffer the most if entrepreneurs decide to lay off workers in order to cope with the higher cost of labor. This leads to an increase in unemployment (especially youth) and may also lead to the growth of the gray sector.
These are, in short, the most obvious potential negative effects of the minimum wage. Of course, not every increase in the minimum wage will necessarily lead to them. It is possible that employers in the sectors directly affected by its introduction will be able to compensate for higher labor costs in a way that does not require laying off workers. This, of course, means cutting other types of costs in the enterprise in question. In the next article in this series, we will look at these alternative methods of dealing with the direct effects of the minimum wage and what their consequences are for the rest of the economy.
This is probably a more appropriate place for my comment from Facebook.
The article is more comprehensive than "cash is king" congratulations for that. And yet you are far right lean you have a very strong confirmation bias.
There are many other sources and studies that do not confirm what you wrote, but you do not cite them. Theoretically, these would be the effects, but empirical data, for example, shows that a 10% increase in the minimum wage leads to a 1% increase in operating costs for businesses, but employee turnover decreases and this 1% is compensated by reduced recruitment and training costs ( http://ime.bg/var/images/MRZ_Analysis_Final.pdf ).
As for the data for Bulgaria that you cite ( http://ime.bg/.../novo-izsledvane-na-ipi-kak-vliyae.../), the study does not include the effects of time, but you must agree that there are events between 2003 and 2013 whose effects on unemployment we cannot lightly neglect.
Because they use fixed effects to analyze the date, we can't also observe the effects for each of the 28 areas, which I would also assume are interesting. It's not clear why they don't use random effects given that the Hausman test recommends it. The unit of the independent variable is also strange, in this case elasticity might be more suitable for interpretation. And for some strange reason they leave out of the analysis the third independent variable "ratio between the minimum wage and the average wage for the respective areas, by year" because it doesn't have the effect that the authors of the study suggest it would have WTF?!.
I assume that many of the arguments in the room are taken from the ongoing debate currently in the states about moving the minimum wage to $15 in NY, and we have specific reasons in Bulgaria. 1. The populist government of Bulgaria and 2. a mass of fees, taxes and fines that are tied to the minimum wage, which would ultimately lead to more revenue in the budget than a few hundred unemployed people (NOT 26k) as the study says.
The Council of Ministers proposes this for minimum wages because the EU Council approved the EC's recommendations for the Bulgarian economy... According to the institution, our economy suffers from "excessive imbalances that require decisive political action and special monitoring."
I don't know if it's just you from the EKIP doing it intentionally or just out of ignorance - the US has a minimum wage and Germany introduced it in 2015, which means that their economists are fools and only the IME and that the IMF economists are wrong - a 1% increase in the income of the poorest 20% in these economies leads to a 0.38% increase in growth.
I have described everything in comment #1 - http://darikfinance.bg/novini/115933#comments
I hope you know who Prof. Dr. Ivan Angelov is - ''The difference in GDP per capita (i.e. in social labor productivity) and in average salary per employed person with those in the EU is huge (45% and 22-23%, respectively) and contradicts all economic logic and elementary justice''
The competitiveness of our economy depends not so much on high wages, but on high energy, material, transport and other costs per unit of production, on poor management at the national and company level, on theft and corruption - according to Eurostat data for 2010, our country consumed 853,774 kg. oil equivalent per 1,000 euros of GDP. For comparison - the energy intensity of the Danish economy, for example, is 104.05 kg. oil equivalent per unit of GDP, Ireland (112,367 kg.) and Great Britain (115,469 kg.) - of course, this is not an accurate criterion because the financial "industry" is included in GDP.
More facts ''for the production of $1,000 worth of output in Bulgaria, 2.6 tons of conventional oil equivalent are consumed, in Estonia it is 0.4 tons, in Croatia - 0.5 tons, Latvia - 0.5 tons, Hungary - 0.6 tons, Poland - 0.7 tons, Czech Republic - 0.8 tons''
Brace yourself, you're exposing yourself - indoctrinating the mind is easiest in economics because it's a special science
Hello, Mr. Shalapatov, and thank you for your comment! I will try to address your various arguments one by one.
1. The fact that the EC has recommended a policy does not mean that this policy is good. The EC imposes an awful lot of market regulations that are not only unnecessary but also very harmful. The fact that they support a policy, such as raising the minimum wage, is not in itself an adequate argument in support of raising the minimum wage. Citing authority without presenting logically sound arguments is a logical fallacy.
2. The same mistake again. What does it matter that the US has a minimum wage? Is the argument here that the minimum wage is somehow related to the relative prosperity of these countries? How exactly? Correlation is not causation. And besides, about Germany and its decision to introduce a minimum wage in 2015, in the article I link to a study by a German economic institute, according to which this will lead to a stabilization of the share of the shadow economy in Germany and in the future perhaps even to its expansion.
On the increase in income and growth - first, there is again the problem that correlation does not mean causation. The fact that where the nominal incomes of the poorest increase, growth also increases does not mean for sure that one is a consequence of the other. And at least when you are going to cite a study, do it like the people and give a link, or at least a title.
Second, raising the minimum wage does not necessarily lead to an increase in the incomes of the poorest 20%. On the contrary, as the article says, it is very likely that the minimum wage will lead to higher unemployment rates among the poorest, and this would clearly have a negative effect on their incomes.
3. Mr. Angelov's statement is a bit strange - what connection does GDP per capita have with average wages? Wages are determined by productivity and the level of competition in the labor market. I don't understand why GDP is mentioned here at all.
4. Regarding the rest of your comment - these are interesting data (I would like to see the source cited), but I'm not sure what they have to do with the article? Of course, it is true that if production is not well optimized enough, it harms competitiveness. But this does not mean that it is justified in such a situation to artificially increase wages - this worsens competitiveness even more.
Hello Mr. Vuldzhiev
I have given the sources from which I draw facts in the link on darikfinance.bg under the article, comment #1.
За твърденията на МВФ – ''увеличение с 1% при доходите на най-бедните 20% в тези икономики води до 0,38% увеличение на растежа“ е от ИНВЕСТОР
I hope you do not doubt the knowledge of Prof. Dr. Ivan Angelov and he talks about GDP per worker and here are more facts - ''According to World Bank experts, protective tariffs of a maximum of 20% are permissible for underdeveloped countries. American and European scientists claim that higher tariffs, import quotas or subsidies are needed, because the difference in productivity between underdeveloped and highly developed countries is now much greater than 20%....'' - http://www.iki.bas.bg/english/CVita/angelov/No248.htm
Essentially
Minimum wage is a type of redistribution and most importantly, DIGNIFIED pay for labor
In 2012, the income gap between the average top manager and his average worker in the US has grown over nine times – from 30 times in the late 1970s to 277 times today – WHO determines what the gap is and let the banksters and other financial speculators take money but why are they saving it with taxpayers’ money 14-23 trillion
Milton Friedman - The American economic system is socialism for the rich and free enterprise for everyone else. If the average person can't pay his debt, he's forced to live in his car. If a banker can't pay his debt, he relies on the taxpayers to bail him out.
Average hourly wages from 1975 to 2010 in the US grew 10 times less than productivity?!
I can give you a lot of facts, and one from your website - ''How Central Banks Cause Income Inequality'' - ''between 1979 and 2007, the incomes of the middle 60% rose by less than 40% while inflation was 186%.''
Казано иначе икономическият растеж се стимулира по два начина :
1) lending - the dream of the banksters and fiat money from the state monetary bank is a separate topic
2) redistribution - minimum wage is a type of redistribution and more precisely and most importantly, DIGNIFIED payment for labor
A separate topic is that world economists were categorical in Davos (2014) and the IMF admitted that inequality causes a decline in final demand, and Nobel laureate Prof. Stiglitz says so in the book "The Price of Inequality", as does Prof. Piketty.
A few unaddressed topics:
The MHP and its impact on demography in Bulgaria.
The MRP and its impact on increasing consumption, etc.
The size of PPPs in the conditions of the Bulgarian economy, which completely change the meaning of the concept of PPPs.
The factors determining the size of the salary in Bulgaria, which are not in Bulgaria, are labor productivity and market competition.
More generally - the theory on the issue of pay and its discrepancy with reality in Bulgaria.
*
Just to remind you that the impact of wages in Bulgaria on demographic processes in Bulgaria leads to a much stronger effect on the economy than the MRL, although there is a connection between the two. Moreover, the level of wages in Bulgaria led to a strong negative effect, while the MRL rather reduced the level of the negative effect.
Hello, Mr. Shalapatov,
I quote part of your second comment: "A separate topic is that world economists were categorical in Davos (2014) and the IMF admitted that inequality causes a decline in final demand, and Nobel laureate Prof. Stiglitz says so in the book "The Price of Inequality", and so does Prof. Piketty." I don't want to belittle anything, but the fact that Thomas Piketty or Joseph Stiglitz have a professorship is not some kind of proof that everything they say is absolute truth and should be taken at face value. Nor is the Nobel Prize, because Krugman has one too, but if you read or listen to his speeches and understand at least a little about economics, your natural reaction would be to wonder what nonsense he is propagating. But let's take Piketty for example. In his book "Capital in the 21st century", Piketty says: "If the supply of any good is insufficient, and its price is too high, then demand for that good should decrease, which would lead to a decline in its price." According to him, therefore, a change in the demand curve alone will restore equilibrium. And what do you think?