THE Nobel Prize for Economics for the year 2021 awarded to David Card for his contributions to scholarship on minimum wages has vindicated trade unions, labour and human rights advocates and pro-labour economists the world over. Card’s work in 1994 refuted the long-held hypothesis that increases in minimum wage reduces employment. At the time, 90 per cent of professional economists believed that a hike in minimum wage was bad for the economy. In Myth and Measurement: The New Economics of the Minimum Wage, Card and Alan Krueger presented evidence that minimum wage hike has either no effect or a positive effect on employment.
Card, a US-based Canadian, and his colleague studied the impact of the increase in minimum wages on workers employed in 400 fast food outlets in New Jersey. They found that a minimum wage hike actually expanded employment. Also, the raised minimum wage generated a ‘ripple effect’ leading to a pay raise for workers who were earning above minimum wage. Most importantly, the research revealed that minimum wage increase reduces wage differential, partially reversing the trend towards wage inequality. Economic research conducted in several countries, since the publication of Card’s and Krueger’s work, indicates that minimum wage increments strengthen demands for products and consumer confidence, keep inflation at bay and cushion government revenues. A significant achievement of Card’s work lies in establishing the supremacy of systematic, on-the-ground, empirical research over abstract theoretical reasoning on issues directly impacting humans. The Nobel Prize has finally put a stamp on the credibility revolution ongoing in empirical economics since the 1980s.
Card’s seminal work has led to growing support for minimum wage in the US, Canada, Australia, Europe and, according to a 2021 study, among international institutions such as IMF and OECD. Change has been slow. In the US, it has been more than a hundred years of struggle. The first law on minimum wage was passed in 1912 by one of the states and a few more followed suit. But opponents got the law withdrawn, terming it unconstitutional. It was only in 1938 that the Fair Labour Standards Act was established as the first federal minimum wage law. Though the federal minimum wage in the US has stagnated to $7.25 per hour since 2009, Card’s study led several states to raise the minimum wage. Currently, 29 states have minimum wages above $7.25. Twenty-two states increased the minimum wages in 2020. Individual cities have also taken action: New York raised the minimum wage to $15 per hour, while Seattle has the highest minimum wage at $16 for large employers and $15 for small employers. Some states have agreed to incremental increases to push the minimum wage to the level of a living wage.
This Nobel Prize has come at the right moment. The Covid-19 pandemic has increased wage inequality, compelling governments to protect workers from falling below the poverty line. It is time not only to augment minimum wages but to also move towards living wages. A living wage, recognised by the UN as a human right, is a wage sufficient to afford a decent standard of living for a worker (a family of four). It includes enough to pay for food, water, housing, education, healthcare, transportation, clothing and savings for unexpected events.
It is time not just to augment minimum wages but to also move towards living wages.
As most governments do not systematically increase minimum wages while the cost of living rises, the real value of a worker’s pay falls over time and minimum wages remain lower than living wages. Economists, unions and labour rights groups, such as the Asia Floor Wage Alliance, the Global Living Wage Coalition and the Wage Indicator Foundation have developed credible living wages benchmarks for different countries. A 2019 research shows that in Asian countries the minimum wage ranges from 13pc of a living wage in Sri Lanka to about 42pc in India. According to the Wage Indicator Foundation, whose living wage computations are based on the cost of living for a predefined food basket derived from the Food and Agriculture Organisation, the living wage in Pakistan in 2020 was Rs32,000 per month while the minimum wage in Sindh was Rs17,500, almost 50pc less than the living wage!
Though it has been established that a robust minimum wage is good for the economy, resistance against minimum wage increase is still strong among employers’ groups and policymakers in Pakistan. When the Sindh government announced an increase in the minimum wage to Rs25,000 per month in July 2021, the Employers Federation and several trade associations filed a suit against the move. What can be done to counter obsolete thinking on the part of employers and convince them of the benefits of increasing the minimum wage?
Several measures taken in tandem would help. Economists in academic institutions (eg PIDE, Lums, IBA) should engage in rigorous research through ‘natural experiments’ and provide convincing evidence to sceptical employers. District-level periodical computations of living wages, such as those carried out by the Collective for Social Science Research in 2016 for urban and rural Sialkot, would build up a solid body of evidence.
The federal government needs to establish the national minimum wage floor, as well as non-statutory national living wages, to motivate provinces to sustain minimum wages. Provincial governments need to make minimum wage-fixing systems genuinely tripartite, robust and transparent (ie selection of members of wage boards, computations and publicity of rates, penalties for false records, appointment of inspectors). Appointment of chairmen to the wage boards should be based on criteria spelled out in the law, that is having adequate knowledge of industrial labour and economic conditions. Trust-building between governments, employers and the workers, and stakeholders’ consensus is vital.
The writer is a researcher in the development sector.
Published in Dawn, October 27th, 2021