(This essay was published in South China Morning Post on 30 July 2014)
Concern about the ability of markets to provide income equity for the least able members of the work force has given the minimum wage its strong social appeal.
Statutory minimum wages were first introduced in developed countries to control the proliferation of inhumane work conditions in sweatshops. Today, they target workers in most low-paid fields of employment in over a hundred countries.
Most economists oppose minimum wage laws because it increases unemployment, particularly among workers with very low productivity due to inexperience or handicap, and therefore fails to reduce poverty. Supporters say it increases the standard of living of workers and reduces poverty.
But if economic and social policy is going to be decided in the interests of the public, it is essential that empirical evidence be brought to examine whether the objectives are being met as intended or not.
Hong Kong enacted minimum wages in May 2011. Has this helped low-income households and reduced income inequality?
A preliminary answer to this question can be gleaned from the data in the General Household Survey. I examined data in the four quarters before and after the minimum wage became effective.
In the four quarters before May 2011, an estimated 233,000 households (or 10% of all households) had at least one member who qualified for the minimum wage. In the four quarters following the introduction of the minimum wage, that number was halvedto 121,000 (or 5.1% of all households). This according to the advocates demonstrates the significant success of the minimum wage in helping low pay workers.
But is this really the case? A more interesting result is the distribution of minimum wage workers across households by income quintile groups.
If most of the minimum wage workers came from the bottom 20% of households by income then we could safely conclude that the legislation was achieving its goals, and that the minimum wage was alleviating poverty across households. But the data (see Chart) shows that one year before May 2011 only 26.6% of the households with a worker qualified to receive the minimum wage came from the lowest income quintile. One year after the minimum wage was introduced an even lower 20.2% could be found in the lowest income quintile.
In fact, workers qualified for the minimum wage were fairly spread out among all households with substantial percentages found even among the top two income quintiles. Prior to May 2011, there were a combined 22.5 per cent of households with minimum-wage workers among the top 40 per cent of households by income, and after May 2011, the top two quintiles’ share in fact increased to 24 per cent.
Many households, including many middle income households and some high income ones, have a member with low pay and low productivity. Targeting low pay individuals fails to focus resources directly on poverty stricken households.
Similar findings have been found in the US, UK and Canada. So Hong Kong is not special and is part of a general pattern commonly found elsewhere.
It is a mistake to believe that the minimum wage helps low-income households. As a policy instrument for alleviating poverty its effects are too diffused among the population to be useful.
It is not difficult to understand why the minimum wage is favored in so many countries. It provides governments with a low cost policy (i.e. it does not require government expenditure outlays) with which they can claim they are addressing the problem of poverty. It also provides politicians and union leaders with a convenient instrument to secure votes and support in their constituencies.
But politicians and officials should face up to the true effects of the minimum wage when it is reviewed later this year. It is an ineffective solution for addressing poverty and its main outcome is to distort the labor market decisions of employers and employees. The only sensible response is to stop pretending it helps poor households. Let us stop wasting precious time on this ineffective policy.