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LESSON 10Compensation structure and DifferentialsTutorial ActivityASIAN LABOR UPDATEChapter 5: Introduction To The Minimum WageLearning Objective

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To study about minimum wage policy

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Does a minimum wage policy protect workers who are under pressure in the ‘raceto the bottom’ of labor standards in a globalising world economy?

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The role of Trade UnionVirtually everywhere in the world, there is on-going debate on the usefulness of minimum wage regulation. Since structural adjustment programmes were introduced inthe 1980s to many developing countries, minimum wage regulation has been under attack on several grounds: proponents of the structural adjustment programme argued thatminimum wage regulation did not help the poorest of poor workers, i.e. those in theinformal sector, as the regulation covered only formal sector workers; furthermore, if aminimum wage is set at an unreasonably high level, it would have a negative impact onemployment and therefore make its overall effect on income distribution at bestambiguous.Particularly, as the accelerating process of globalisation forces nation states to competeagainst each other to attract more foreign investment, minimum wage regulation is seenas a possible barrier to more investment.Before looking at the current debate on minimum wage policy, it is useful to have a brief look at the definition, aim, and history of minimum wage regulation.A minimum wage is a minimum level of payment established by law for work performed.Its purpose is to protect vulnerable low wage workers from exploitation. It is a time- based wage that usually applies to unskilled adults entering work for the first time. As aminimum wage is established by a law, it is legally enforceable.The key purpose of a minimum wage system is social to prevent labor exploitation and poverty. This means the minimum wage should provide sufficient purchasing power toenable a worker to have a basic standard of living. The minimum wage may also have an

economic objective - to motivate workers, enable them to enjoy the benefits of economicgrowth, and contribute to the economy.It is generally considered that minimum wage regulation was first developed in NewZealand (1896) followed by Australia (1899), and later Britain (1909). As the mainobjective of minimum wage regulation was the elimination of ‘sweating’, that is the payment of exceptionally low wages, its application was usually restricted to a limitednumber of particularly low-paying sectors or to selected categories of workers, such ashome-workers, women, children and indigenous workers judged to be particularlyvulnerable.A number of developing countries also carried out experiments with minimum wageregulation to protect categories of workers judged to be particularly vulnerable. For instance, Sri Lanka’s Minimum Wage Ordinance was promulgated in 1927, whileArgentina introduced the Home Work Act in 1918 with a view to protecting low paidhome-workers.However, with the exception of a few countries, minimum wage fixing remained a rarelyused and limited instrument of government policy in both industrialised and developingcountries before the Second World War.Towards the end of the economic depression of the 1930s and after the Second WorldWar, the number of countries adopting minimum wage regulation grew rapidly. Therewas also a trend towards extending wage protection to more and more groups of workersand in many cases was more universal.The early development of minimum wage regulation and subsequent expansion since the1920s are well reflected in a series of International Labour Conventions on minimumwage regulation by the International Labour organisation (ILO): Minimum Wage FixingMachinery Convention (No. 26) 1928, the Minimum Wage Fixing Machinery(Agriculture) Convention (No. 99) 1951, and the Minimum Wage Fixing Convention(No. 131) 1970.In spite of impressive development of the minimum wage system in many countries,however, it should be noted that as with industrial relations, both the exact nature and thescope of minimum wage protection reflect the particular historical and institutionaldevelopment of the country concerned.Some countries in Asia, for example Thailand, Indonesia, China, and Japan, havedecentralised minimum wage systems, while others like South Korea and Vietnam have asingle minimum wage for the entire country. Cambodia has minimum wage fixingmachinery only for the country’s garment and textile sector.As seen above, minimum wage regulation had been adopted by more and moreindustrialised and developing countries as a major social policy tool to protect low-skilledworkers by establishing a minimum wage floor under which no payment should be made.

But the usefulness of a minimum wage is now under question by policy-makers andeconomists, as both developing and developed countries have faced a serious under-employment and unemployment crisis since the 1980s.The standard argument against the minimum wage system was based on the assumptionthat a minimum wage above a certain level will cause unemployment and thereforeinadvertently work against poverty reduction. In the specific context of informalisation indeveloping economies, a minimum wage system in the formal sector was blamed for crowding out formal sector jobs into the informal sector.But empirical [= practical, as opposed to theoretical] research undertaken recently did notshow a negative effect on employment by moderate increases in the minimum wage.Also, recently the ILO undertook a multi-country statistical analysis of the effect of minimum wages on poverty, employment, and informalisation in developing countries.The study found that if other things were equal, the level of the minimum wage has aninsignificant effect on the level of employment. Also, the study concluded, after analysing economic data in Latin American countries, that changes in the ratio betweenthe minimum wage and the average wage exert no significant impact on the share of theinformal economy in South and Central America.This result supports the view that labour market rigidity, and more specifically low wagerigidity, is not the major factor behind the informalisation of Latin American economies.Regarding the effect of minimum wage on poverty, ILO analysis found that for a constantlevel of GDP per capita and average wage in manufacturing, in one locality, a higher minimum wage is associated with a lower national level of poverty.In sum, the research findings strongly support the idea that the minimum wage may bring positive results in poverty alleviation by improving the living conditions of workers andtheir families while having no negative results in terms of employment. Also, noevidence indicated that the level of the minimum wage relative to the average wageaffected the size of the informal economy in Latin America.The above studies suggest that the argument against a minimum wage system indeveloping countries on the grounds of employment and poverty is not convincing.Let us examine another important argument against minimum wage regulation which isoften put forward in the context of globalisation and competitive edge. Often it is allegedthat a high minimum wage is responsible for weakening competitiveness of industries.But is it really true?Take the case of Thailand. At the peak of the Asian financial crisis in 1997 - 1998, therewas a heated debate on the role of the minimum wage in Thailand. One view argued that