Will workers really benefit from a minimum wage hike?

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Esther Dean
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1 Will workers really benefit from a minimum wage hike? More than 0,000 workers in Hong Kong are expected to receive an 8. percent increase in their minimum wages next year. According to the Secretary for Labor and Welfare Matthew Cheung Kinchung, the Provisional Minimum Wage Commission has proposed to raise the statutory minimum pay to HK$. (US$.) per hour, up from HK$0 at present. The new minimum wage policy is awaiting approval from Chief Executive Leung Chun-ying and Executive Council, and is expected to take effect in May next year. Cheung told media last week that more than 00,000 people have re-entered the labor market over the last three years as a result of the minimum wage policy. Middle-aged women have rejoined the labor force and the economic situation of the working poor (workers whose incomes fall below a given poverty line) has also improved. Still, the minimum wage policy has been a subject of debate.there are worries that raising the minimum wage will discourage companies to hire more people, and bosses will try to keep down the labor cost by increasing the workload of its current employees and cutting back benefits. On the other hand, some quarters point to the positive impact of the policy on the living standards of the poor. Jeffrey Lam Kin-fung, a representative of the employers and vice chairman of the Business and Professionals Alliance for Hong Kong, is against the bill, warning that small and mid-sized firms would suffer if the minimum wage rose further. Lam also said the Occupy campaign is hurting consumer sentiment and affecting the retail and catering businesses. In view of the political uncertainties, he said, now is not the right time for workers to ask for a large pay rise. Leung Chau-ting, a worker representative at the Labor Advisory Board, supports the pay hike, noting that the proposed HK$. minimum wage won t even be enough. He told the media that at the proposed level, the minimum wage worker s monthly income would just be around HK$6,700.He said HK$ is a more appropriate level, which amounts to HK$7,00 a month. These few hundred dollars of additional income would be extremely important for the poor, Leung added. Experience of foreign countries shows that a minimum wage policy would raise the living standards of some workers, but it may also hurt others.for those who are working full-time, a rise in the minimum wage could definitely raise their total income. However, the policy has also prompted employers to cut the number of full-time jobs and hire more temporary workers in order to bring down costs.in other words, the disemployment effect could lower the number of full-time workers. So while full-time workers benefit from the hike, others may be crowded out and forced to become part-time workers and earn even less. Contact us at english@hkej.com

2 DEDEE Define Minimum Wage "The lowest level of earnings for employees set by government legislation." Price flooring: The lowest legal price a commodity/resource can be sold at. Explain: Type of government intervention Fixing the wages above the market determined level above the equilibrium price Labour Supply curve represent the labour willing and able to be hired in the market while the Labour demand curve stands for the job opportunities available to prospective employees Create surpluses, quantity supplied of labour exceeds the quantity demanded for labour, which causes unemployment (QS > QD) Increasing the minimum wage will increase the surplus, worsen unemployment Diagram: 0 9 Demand 8 7 Consumer surplus Supply Price 6 DWL Surplus Producer Surplus Quantity The diagram shows the effect of minimum wages. Price is fixed at HK$.0 above the equilibrium price HK$0 (assuming market equilibrium is equal to the existing minimum wage) Surplus shaded in blue Deadweight loss arises, shaded green

3 0 Inelastic demand 9 Demand 8 Elastic Demand Supply 7 6 Surplus Price Quantity Price flooring vs elasticity Inelastic demand means that raising the minimum wage will have a limited effect on the demand for labour Elastic demand means that increasing the minimum wage will see labour demand contract significantly The more elastic the demand curve for labour, the greater the surplus, which indicates a greater level of unemployment in the market Example: More than 0,000 workers in Hong Kong are expected to receive an 8. percent increase in their minimum wages next year. Provisional Minimum Wage Commission has proposed to raise the statutory minimum pay to HK$. (US$.) per hour, up from HK$0 at present Cheung told media last week that more than 00,000 people have re-entered the labor market over the last three years as a result of the minimum wage policy. Jeffrey Lam Kin-fung, a representative of the employers and vice chairman of the Business and Professionals Alliance for Hong Kong, is against the bill, warning that small and midsized firms would suffer if the minimum wage rose further. For those who are working full-time, a rise in the minimum wage could definitely raise their total income. However, the policy has also prompted employers to cut the number of fulltime jobs and hire more temporary workers in order to bring down costs.

4 Evaluation: Short term effects: Advantages o Labour: Reduce the income gap between rich and poor by increasing the wage of poor Reduce poverty in a nation, more income leads to a better life for poor and better motivation to work (efficiency wages) Protect rights and dignity of employees, employers cannot bargain down the basic employee wage ensuring a certain standard of living Incentive for employment, an unemployed person will be more active to seek employment with the prospect of a higher relative wage o Government: Gain political support from low income earners Disadvantages o Labour: Affect working atitude because they will receive the same wage as heir fellow workers no matter how active they are working, reduces incentive to improve quality of work done. o Employers: Increase the cost of business, as they need to pay more for the labour element of the costs of production o Social: Black market may arise because some workers are willing to work below minimum wage just to get a job, which will affect the efficiency of HK labour market Pushes up inflation, as the cost of firms increases, they will transfer the burden onto consumer by the increasing price of their final product Long Term effects: Advantages o Labour: As incomes of poor increase, their dependents could be in a better situation to become skilled as they have ability to stay in school longer Reduce the market power of employers where they decide the market wage evens up the bargaining relationship between labour and employer o Employers: Act as a common reference for wage of young unskilled workers

5 o Social: Maintain social stability, higher income reduce social problem e.g. family/domestic violence Next gemeration of poor will be more competitive as their talent is enhanced by the increased income Small business budgeting will be easier with the imposed minimum wage o Government: Minimum wage allows people not to rely too much on public services which reduces government burden Disadvantages: o Labour: Increase unemployed rate because company will hire less people to cut their cost o High skilled workers: Unless the wage differential between low-skilled and high-skilled workers remains, complaints will arise from high-skilled labour as they do not see the new minimum wage benefitting them

Lecture 6 Notes. Maria Zhu Duke University. November 16, 2016

Lecture 6 Notes. Maria Zhu Duke University. November 16, 2016 Lecture 6 Notes Maria Zhu Duke University November 16, 2016 Contents: Chapter 6 (Government Actions in Markets) Class Plan 1 Price Ceilings Price ceiling: government regulation that makes it illegal to