Challenging the Myth of Neoliberal Economic Superiority
Neoliberalism as an economic system seems to be the dominant orthodoxy right now, which gives a misleading impression that there aren’t any viable alternatives at the moment.
I don’t think that’s true. I feel that a social democratic economic system is the more ‘civilised’ way to go. I don’t believe that a free-market holds the answer to everything. Well documented instances of market failures have already proven that.
Lets look at some aspects of this argument. Starting with minimum wages. Most social democratic parties advocate the implementation or raising of the minimum wage, while most neoliberals howl at the idea. Why is it such a bad idea? One can’t treat workers as just another commodity, in which their wages are subject to the supply and demands of the market. Workers rely on decent wages to maintain their standards of living and provide for their families.
So what if the economic outlook isn’t so good at the moment? That shouldn’t be an excuse to lower worker’s wages. Why? Because when will it end? It’s a race to the bottom. Also, what’s stopping companies to all just agree to pay artificially low wages to all workers in their industry?
Furthermore, economic rationality has boundaries as well. Since having slaves as cheap labour is an economically rational thing to do, why isn’t that practice continued now? Because society views it as a unethical thing to do, and have set certain standards in regards to what’s acceptable. We can apply the same argument to minimum wages. If a McDonalds McValue meal costs US$6 in the USA, then should the the minimum wage there be only US$5.15? Compared to Australia, in which the same meal costs about AU$6, but the minimum wage here is AU$12.00. Working-class people here have higher standards of living compared to their counterparts in the US.
Some neoliberals would argue that minimum wages would lead to increased unemployment. I say to them, if you were in charge of a highly-developed or medium-developed economy, do you seriously still expect to still compete with China and India in the manufacturing industry? Instead of keep lowering workers wages in a futile attempt to do that (good luck), shouldn’t these countries instead increase their worker’s values and productivities through training or technology, things that the labour forces in third world countries don’t have yet?
Next we came to government intervention in the economy. I believe that governments have been unfairly demonised these days. I believe that governments can be a force of good in developing their countries.
For proof of this, I present the nations of Japan, South Korea and Singapore. The Asian Dragons and Tigers, in effect. The common trend in these nations are that their governments played a pivotal role in guiding the direction of their economies. For example, Korea under Park Chung-Hee embarked on an ultimately successful medium and heavy manufacturing industry which spawned Hyundai, Kia, LG and Samsung. Chaebols (modeled after Japan’s zaibatsus) were formed, which although had their negatives such as some instances of corruption, nepotism, cronyism, also undeniably have many positives. For one, these types of govt-business cooperations help ensure that government funds are channeled into industries which it wants to develop in a concentrated and systematic manner. It may be a bit oligopolistic, but it does help pool together a nation’s resources to compete against, and eventually overtaking its business competitors from more developed and wealthier countries. In return for the government providing those chaebols with contracts, there is an understanding between them that chaebols should ensure that they provide long-term employment to the citizens there, and share their acquired skills and technologies. Much of the economic development of Japan and Korea were based on these zaibatsu and chaebols. Malaysia tried to follow this model, but fell short due to the low productivity of its Government-Linked Corporations (GLCs).
For a comparison, Brazil and many South American nations initially embraced a neoliberal economic model as encouraged by the USA, and many of them have failed. MNCs from developed countries used these country’s relatively foreign-business friendly policies to hire workers on the cheap, exploit their nation’s resources, and channel most of their profits back to their original countries. Hardly any diffusion of high-level skills or transfer of technologies happened. Implementing economic policies with very little protectionism in the form of ‘infant industry argument’ has also resulted in stunted growth for local companies in those so-called neoliberal economic countries. These countries then become very dependent of foreign investments, and if for whatever reason those MNCs and TNCs decide to uproot and relocate to another country, these countries would face dire economic downturns. Most South American countries also have a relatively small middle-class, due to their huge gap between their elite business class who are involved with those MNCs, and the poor masses stuck with doing low skilled jobs. Instead of promoting capitalism, all this have the opposite effect instead, causing voters in those countries to vote in socialist governments.
Let’s move on to the social democratic taxation system now, shall we? Once a country has acquired a sustainable level of wealth, what’s so wrong about spreading it among its society more equitably? This is where the progressive taxation system comes in. Higher-income earners are taxed proportionally more compared to lower-income earners. This is because, honestly, if one is already multimillionaire, will a 45% tax on his income really put a dent on his lifestyle? What has he lost due to taxes? Another new yatch?
And the demonisation of welfare systems is also unfair, in my opinion. Is it so reprehensible to provide an adequate welfare system to citizens who have fallen on hard times? “It’s their own faults”, you might say. Then I’ll say this: Is it a family’s fault that their father, their sole breadwinner died suddenly? Is it that person’s own fault that he can’t be employed because he’s deemed too old by prospective employers? Is it a person’s fault that he can’t work because on an injury?
I don’t think so. I think that a person has an obligation to the society which he belongs to to care for those disadvantaged groups above. Unless they want to live in a class-based society with large differences between its member’s standards of living. What is the use of USA being the largest and wealthiest economy in the world when its poorest members, getting paid US$5.15/hour, cannot even afford a McValue meal after working for an hour? Much less support a family. Which results in them having to take on an extra job, causing them to spend less time with their kids. This in turn might cause their kids to socialise with gangs in order to obtain a sense of belonging which they were unable to get from their parents. This the could ultimately lead to increased crime and social fragmentation. Does that sound like a place you would wanna live in?
Firstly, most country even the most liberal market one, the US, claim it goal as social-democracy. I don’t know where you get the idea that proponent of free markets do not have a social conscience. The issue really is how best to achieve social-democracy and in particular the role of the state.
You appear not to understand the original critic of minimum wage which is that it discourage job creation. The debate was thought settled when Reaganomics and Thatcherism took hold.
Today there is renew interest to look at the issue especially recent move in the US to raise minimum wage. In particular, states with higher minimum wage does not seem to be worst off in job creation than states with lower minimum wage. For example California has one of the highest minimum wage and its the best job creator with its new economy robustness.
Its an interesting issue that deserve serious thinking but the answer I think is not going to be simple. Minimum wage in uncompetitive economies do much worst. Then there is the issue of industry dependent on imported migrant labour where minimum wage would raise a whole host of issue including economic viability of many. In the end, its chicken and egg - if an economy is uncompetitive in the first place, does it make sense for the government to force it wihout at least equally creating conditions of competitiveness?
On your argument about Chaebol, Zaibatsu and our own GLCs. There is now a consensus that there is merit to ‘infant industry argument’. The problem firstly is that track record shows that state fails miserably and the gain is not profit although job creation, at least temporary, has some merit. For those ignorant, data shows that if all the capital invested in chaebols and zaibatsu were totalled and their losses and profits also totalled, the evidence show that the result is it does not pay for the cost of capital. There were winners and success certaintly but the number and degree of failures are many and much more in the long run.
My own suspicion is probably the same as yours that you can only make ‘infant industry argument’ within the limits of opportunity for productivity improvement. If the opportunity is none or limited in the first place, then the result is inevitably disastrous as is the case with our many mega-projects and GLCs.
There is some justification for state intervention in economy but in the end its limited. The problem all along is how do we design a system that self-serving politicians is accountable to this limit. Given inherent poor accountability, the choice really is to minimise state role.
Free market certaintly is not perfect and Hayek and Adam Smith admits that from the beginning of their work. But their claim only is that its still the best choice not a cure-all nor even a really pleasant cure even.
Comment by Bigjoe — February 23, 2007 @ 1:12 am
Uh, dude…there are many more better arguments for a minimum wage out there. Your arguments don’t really do the proposal credit, especially since most of them are based on a faulty understanding of economics.
“One can’t treat workers as just another commodity, in which their wages are subject to the supply and demands of the market. Workers rely on decent wages to maintain their standards of living and provide for their families.”
The problem is that there are a lot of attendant inefficiences that result when you set a minimum price for anything, including labour. These inefficiencies go beyond unemployment - finding them wouldn’t be too hard if you avoided the crazy right wing ideologues and read something written by real economists.
“So what if the economic outlook isn’t so good at the moment? That shouldn’t be an excuse to lower worker’s wages. Why? Because when will it end? It’s a race to the bottom. Also, what’s stopping companies to all just agree to pay artificially low wages to all workers in their industry?”
The race to the bottom argument and artificial collusion both fail because these things don’t and can’t happen. Cartels formed to lower wages will fail for the same reason that cartels formed to raise prices (e.g. OPEC) fail - the tragedy of the commons. (Although it’s not a tragedy in this case.)
“Since having slaves as cheap labour is an economically rational thing to do, why isn’t that practice continued now?”
Uh, no, it’s far from economically rational. It’s rational for the employer, but not for the employee, and thus the equilibrium price for labour in any market would be almost certainly higher than zero.
Comment by johnleemk — February 24, 2007 @ 7:43 pm
The argument against minimum wage is simple. The reason why “neoliberals” oppose minimum wage simply because it is a blunt policy targeting a vast range of businesses. And if minimum wage is really that effective and causes no major unemployment issues at the lower rungs of society - why stop at, say, AU$13.47? AU$135/hr would solve a whole lot of problems.
Plus, with everyone in the top tax bracket, maybe the Australian government could fund proper Economics classes to ensure less social democrats coming out
But seriously, minimum wage affects the poorest lot of society negatively far more so than businesses. While businesses could offset the change by hiring more productive employees and making their operations more capital intensive, the truly poor have no jobs because their productivity is below the minimum wage.
If you’re a, say, 50 year old illiterate that can only speak Hokkien and Malay - how much retraining could you do to get rehired with a labour market with a price floor?
If living wages is such a noble goal, why not add on to the wages of the poor, rather than require businesses to raise their wages. The negative income tax, for example (I think there’s a Wikipedia article on it) guarantees a certain level of income while making sure there is still incentives to move up. Removes the need for a whole lot of other welfare measures as well.
Neoliberals and most classical liberals don’t ignore the poor and despondent, rather, we think of ways we can use the market to serve them (or at least find measures that distorts the market least).
BTW, there wouldn’t be a need for a minimum wage *if* the cost of living isn’t that high, especially in countries like Australia and UK. Part of the reason behind this is property prices: governments distort the prices with controlled release of land and strict zoning and planning rules. Plus, add the massive tax burden businesses hold - most of which passed on to the consumer. Liberal policies, with minimal intrusion in the market, would actually help the poor by lowering their cost of living.
Comment by Rajan R — February 25, 2007 @ 2:09 pm
“Also, what’s stopping companies to all just agree to pay artificially low wages to all workers in their industry?” - quite simply, they wouldn’t be able to sign a contract to that effect.
That means any company can raise their wages and get first picks on employees.
Comment by Rajan R — February 25, 2007 @ 2:12 pm
2) Minimum wage laws affect general unemployment rate, albeit minimally - thus using such rates shows you miss the point. Minimum wages removes jobs worth less than that minimum wage - such job form a very tiny proportion of the general labour market. Even if minimum wage does not affect society at-large, it does affect very negatively the very people it purported to help.
3) Yes, the market isn’t perfect. But how does that make minimum wages better than the market?
And back to sigma, Brazil and most other South American countries never plunge deeply into neoliberal economics (unless you have a different definition of neoliberal). The one country that did pursue a liberal economic agenda was Chile, regretfully though under Pinochet - it is one of South America’s most developed countries and one of the few that isn’t stagnating.
Ironically, since democratization, Chile have been ruled by social democrats - that still pursue liberal policies (including foreign trade, removal of protectionist barriers and privatization)
Comment by Rajan R — February 25, 2007 @ 2:28 pm
First off, sorry on taking so long to reply to your replies. Had to settle some things earlier, as well as needing to slam the Oscar’s choice while it was still hot news
Now, on with my replies to your comments then.
On the minimum wage:
There has been studies now debunking the notion and a reasonable level of minimum wage raises unemployment levels, by Card and Krueger, which can be seen here.
Rajan, John Lee and Bigjoe all seem to share the view that a worker’s wage should strictly be based on the market. If that’s the case, almost everybody can drive buses or operate manufacturing machinery right? It’s just a matter of pressing buttons or steering the wheel. So what should their wages be then? RM1.50 an hour? After all, if they complain that they can’t feed their families with it, their employers can (rightly) say that he could just throw a pebble at a crowd and anybody else can replace them. So where does that leave those workers?
True, if they continue with their work, they would remain employed. But what’s the point if they’re being paid so low in the process?
A collusion of businesses offering super-low wages might in reality not be possible, but maintaining low wages for their low-skilled workers is more than possible. After all, why pay them any more when their skills are so common?
John Lee claims that my slave labour analogy is flawed because the employees don’t have a say in things, in his reply:
“Uh, no, it’s far from economically rational. It’s rational for the employer, but not for the employee, and thus the equilibrium price for labour in any market would be almost certainly higher than zero.”
It may be higher than zero for a free low-skilled worker, but how much higher if its based solely on the market? RM0.50 - RM1.00 is not a bad proposal for the outcome of their wage, don’t you think?
I thus would then like to ask him, realistically, how much bargaining power does a low-skilled worker have against his powerful employer in determining his wages? That’s where unions come in, which I incidentally support to a certain degree, and which I will defer from talking about until next time.
But a forced slave labour force and a free but low-skilled labour force are actually not all that dissimilar. One has no rights to bargain at all, while the latter has very minimal leverage.
On Rajan’s broadside:
“The argument against minimum wage is simple. The reason why “neoliberals” oppose minimum wage simply because it is a blunt policy targeting a vast range of businesses. And if minimum wage is really that effective and causes no major unemployment issues at the lower rungs of society - why stop at, say, AU$13.47? AU$135/hr would solve a whole lot of problems.”
Are minimum wages a ‘blunt instrument’? If we carefully set a minimum wage that takes into account the lowest-skilled worker’s abilities, one which adequately provides him with a decent standard of living and which enables him to provide for his family, then any other workers with skills set higher than that low-skilled worker should logically be paid higher than the minimum wage by his employers. If this is the case, then minimum wages only affects the lowest of the low-skilled workers, and no one else. So why is it a ‘blunt instrument’ then?
However, his suggestion of why not raising the minimum wages up to AU$135 is when it starts distorting the aims of the minimum wage and thus making it into a ‘blunt instrument’. That’s because medium-skilled as well as some highly-skilled workers will still not command those sorts of hourly rates. So if the lowest skilled workers gets paid so much, either employers will no longer employ them, or those other 2 skills brackets of workers will demand wages exceeding that, thus artificially inflating their wage levels, increasing inflation and thus damaging their country’s economy.
BTW, there wouldn’t be a need for a minimum wage *if* the cost of living isn’t that high, especially in countries like Australia and UK. Part of the reason behind this is property prices: governments distort the prices with controlled release of land and strict zoning and planning rules. Plus, add the massive tax burden businesses hold - most of which passed on to the consumer. Liberal policies, with minimal intrusion in the market, would actually help the poor by lowering their cost of living.
Basing this next part of my argument on the 2006 Big Mac burgernomics chart here.
Australia has a minimum wage of about US$9.30/hour (AU$12.00/hour), and a Big Mac here costs US$2.67.
The USA, in comparison, has an average minimum wage of about US$5.15, so logically, this should mean that ceteris paribus it’s Big Mac should cost less. But yet, it costs US$3.22 there!
So much for the notion that neoliberal economies such as the USA’s results in lower cost of living.
Comment by sigma — March 3, 2007 @ 2:24 am
Reply to Rajan: I got my information about South American countries practicing neoliberal economic systems from Noam Chomsky’s book ‘Profit over People: Neoliberalism and the Global Order‘.
Due to him being a staunch socialist, naturally he is currently being derided by most neoliberal countries.
I too, with my Third Way persuasions, do not agree with all of what he says, but I feel that to simply sideline his side of things is arrogant at best, or willful ignorance at worst.
So anyway, here are some of the excerpts from that book:
p.27: “In the highly praised history of the Americanisation of Brazil that I mentioned, Gerald Haines writes that from 1945 the US used Brazil as a “testing area for modern scientific methods of industrial development based solidly on capitalism”
“Foreign investors benefited…. but the World Bank reported that two thirds of the population did not have enough food for normal physical activity.”
p. 33: “Latin America has the world’s worst record for inequality, East Asia among the best.”
“Latin American economies have also been more open to foreign investment. Since 1950s, foreign multinationals have “controlled far larger shares of industrial production” in Latin America than in the East Asian success stories, the UN analysts of trade and development (UNCTAD) report. Even the World Bank concedes that the foreign investment and privatisation it hails “has tended to subsitute for other capital flows” in Latin America, transferring control and sending profits abroad.”
“It would seem would seem that openness of the international economy carried a significant cost for Latin America, along with its failure to control capital and the rich, not just labor and the poor”.
Comment by sigma — March 3, 2007 @ 6:07 am
”
Rajan, John Lee and Bigjoe all seem to share the view that a worker’s wage should strictly be based on the market. If that’s the case, almost everybody can drive buses or operate manufacturing machinery right? It’s just a matter of pressing buttons or steering the wheel. So what should their wages be then? RM1.50 an hour? After all, if they complain that they can’t feed their families with it, their employers can (rightly) say that he could just throw a pebble at a crowd and anybody else can replace them. So where does that leave those workers?”
*cough* Rajan mentioned the negative income tax, which is an anti-poverty measure supported by several economists, including “neo-liberals” like Milton Friedman. It’s a much better alternative than the severe distortions any direct interference in a market would cause.
In the first place, if you are so easily replaceable, the onus is on you to improve your skills to make yourself more competitive in the labour marketplace. The trouble is that education can cost a pretty penny these days - and that’s where other anti-poverty measures come in.
IMO, the government shouldn’t be forcing businesses alone to pay directly for the costs of fighting poverty. As I wrote before, since it’s impossible to apportion blame for poverty, it’s better to consider poverty as a negative externality caused by society as a whole: http://www.infernalramblings.com/articles/Economics/100/
Therefore, anti-poverty measures should be funded by society as a whole, and not be funded by businesses alone. Furthermore, if you did want to make businesses alone fund the anti-poverty fight, a minimum wage would be one of the worst ways to do this because it’s an indirect tax (well, so to speak) working at the margin - the costs increase substantially every time another worker is hired. It would be better to charge businesses a direct tax because this would not directly distort the labour market while still ameliorating poverty.
This is exactly what Rajan meant when he said that minimum wages are a blunt instrument. There are far more better targeted ways of addressing poverty than indirectly taxing companies for every additional unit of cheap labour they employ.
”
It may be higher than zero for a free low-skilled worker, but how much higher if its based solely on the market? RM0.50 - RM1.00 is not a bad proposal for the outcome of their wage, don’t you think?”
So? Since when was there a social obligation on businesses to pay people more than their skills deserve? If these people are suffering, the social obligation is on society, not business alone. By distorting the incentive to improve one’s skills, the minimum wage can actually be harmful in the long run. Better targeted measures like the negative income tax avoid the poverty trap.
“I thus would then like to ask him, realistically, how much bargaining power does a low-skilled worker have against his powerful employer in determining his wages? That’s where unions come in, which I incidentally support to a certain degree, and which I will defer from talking about until next time.”
Now you are contending that the worker is *not* being paid commensurate with his skill, and that he needs collective bargaining to solve the problem. I’m not well-informed about this area of economics, but I’m far from convinced that unions are a bad idea. As long as membership in the union is voluntary, what’s wrong?
”
But a forced slave labour force and a free but low-skilled labour force are actually not all that dissimilar. One has no rights to bargain at all, while the latter has very minimal leverage.”
The difference is that the slave has no bargaining power because he/she is chattel. The low-skilled worker can quit and move on to another employer, if the current employers is being far too nasty. The market works both ways - it can drive wages up, it can drive wages down.
“If we carefully set a minimum wage that takes into account the lowest-skilled worker’s abilities, one which adequately provides him with a decent standard of living and which enables him to provide for his family, then any other workers with skills set higher than that low-skilled worker should logically be paid higher than the minimum wage by his employers.”
Accounting for this is a lot more difficult than it would sound. First we have to objectively define what’s a decent standard of living. (Should the guy be able to afford a house? A flat? But what if he has half a dozen kids?) Then we have to calculate what would be the appropriate wage for this. And then we have to take into account the fact that not all households are the same, and that some workers are teenagers looking for a side-income, others are singles, and others have huge families. You can’t define a single minimum wage that would be fair to everyone and take their varying circumstances into account.
Hence, a minimum wage is a broad and blunt instrument. The negative income tax is a far more effective means of ameliorating poverty.
The only reason the minimum wage has been somewhat successful is that at the lowest levels, it’s still not so distortive. The distortion increases as the minimum wage increases, and as many left-wingers feel that the current minimum wage in many countries (including the US) is far too low…
Whatever the case, they haven’t considered the negative income tax just yet, which is a real shame.
“So much for the notion that neoliberal economies such as the USA’s results in lower cost of living.”
Actually I don’t think there’s that huge a difference between the American and Australian economies in this regard. Even if the federal American government is rather laissez faire, the state and local governments have substantial power to impose constraints on the market. Zoning regulations, for example, fall under the purview of local governments. Several economists have argued that the main reason for the rising real estate prices in America in recent years has been due to the distortions caused by zoning regulations and rent controls.
Comment by johnleemk — March 3, 2007 @ 8:29 am
John Lee: “Now you are contending that the worker is *not* being paid commensurate with his skill, and that he needs collective bargaining to solve the problem. I’m not well-informed about this area of economics, but I’m far from convinced that unions are a bad idea. As long as membership in the union is voluntary, what’s wrong?”
I have never said that workers are supposed to be paid ONLY what their skills are worth. I recognise that some workers have skills that are worth very little. Therefore in this, I must concur with Marx’s quote of “From each according to his ability, to each according to his needs!” A worker’s pay, in my opinion, should also enable him to maintain a certain standard of living to be considered a ‘decent’ pay.
I’ve always been a qualified supporter of unions. And of course most blue-collar workers need to band up in the form of unions to boost their bargaining power. That was one of the main reasons why trade unions were born. In an employer-employee relationship, there is a disproportionate amount of power on the former’s side, especially if the latter possesses only common low-level skills. Therefore, to remedy their inequitable bargaining position, workers unionise and use the threat of strikes.
A single low-skilled worker will surely be on the losing end if he goes mano-e-mano with his employer in his wage negotiations.
I have very little problems making business fund anti-poverty measures, as I have a Stakeholder view of business in society. I subscribe to the notion that business are part of the societies which they are in. They utilise the workforce to generate profits for their owners, and as such, those workers should also have a share of those profits in the form of decent wages.
In fact, since the owners and managers and what nots of business are people, businesses can be thought of as ’society’ as well. So there you go, society is funding anti-poverty measures through minimum wages.
Comment by sigma — March 3, 2007 @ 2:47 pm
Argh, you are sooo missing the point. :p
Of all the ways to make businesses pay for the problems of poverty, the minimum wage is the worst one! Why make them pay extra for another unit of unskilled labour? If you logically follow this, it leads to unemployment and all the other problems caused by a minimum price in any market. Avoiding this problem while making businesses pay is simple - tax businesses directly! That’s what Rajan and I mean when we say the minimum wage is a blunt instrument.
Also, you ignored the fact that I used the word “alone”. Why tax businesses alone? Society as a whole should be paying for the problem of poverty.
You are unfairly keeping the poor from gainful employment (even if this employment cannot completely fulfill their needs), and preventing the most efficient utilisation of resources. If there were no other alternative, this would be a sensible thing, but there *are* alternatives! Why can’t you just tax businesses directly? And what’s wrong with the negative income tax, to the point that introducing inefficiency via the minimum wage is necessary?
You are also taking a very simplistic and artificial view of the economy. The minimum wage does not factor any important facts into how it works. It does not account for who the employee is - whether he is a secondary school dropout, a single mother with three kids, or a retiree without a pension - nor does it account for who the employer is - whether it’s a multinational conglomerate, or a “mom and pop” grocery store. How on earth is it fair to give the same “living wage” to a teenager looking for some extra income, and a single mother with a family to support? How on earth is it fair to charge the same tax on employment to both the multinational and the small family firm?
That is why as I said, direct progressive taxation is a much better alternative if you want to solve the problem of poverty. The minimum wage is an inferior solution. Unlike the minimum wage, the negative income tax takes into account the tax bracket of the person, and the corporate tax does the same. How on earth is this a system that would be less fair than a minimum wage system?
The problem as I see it, is not that we don’t have a minimum wage or that the minimum wage is too low. It’s that we’re trying to fight poverty with a horridly blunt instrument, when the real solutions are staring us in the face, and have been advanced by respected economists, including the Nobel Prize-winning “neoliberal” Milton Friedman.
Comment by johnleemk — March 3, 2007 @ 6:00 pm
sigma: There are more ways than one to provide workers with decent living wages *without* minimum wages.
Minimum wage:
1) reduces jobs
2) penalizes businesses
3) increase, generally, the cost of living (higher business cost=higher prices)
Lets say we go for a more liberal “workfare” or earned income credits: the poor gets decent living wages while still having jobs. Why is a blunt policy necessarily a good thing?
While you don’t see labour as a commodity - what if we apply the same logic to other goods? Lets say, “Lets give rice farmers a good wage to commensurate their hard work” and race prices to, say, RM10/kg. What would happen? Bread becomes cheaper, people switch - consumption of rice goes down and the very farmers you are trying to help lose out.
Comment by Rajan R — March 4, 2007 @ 2:34 pm
To John, personally I disagree with taxing businesses. Why? Businesses aren’t autonomous entities (except in law), reduced profits from taxation means shareholders - a bulk of whom are the middle-class (ohh, pension funds - love them) - or increased prices to make up for lost profits (raised prices act like a regressive tax - the poor necessarily pay a higher proportion of their income than the rich).
I think most taxes should be replaced by an personal income tax, whether flat or progressive. Alternative, a sales tax with rebates for the poor may well be cheaper to collect than income tax…
Comment by Rajan R — March 4, 2007 @ 2:39 pm
sigma: I like to, apparently, split my comment up into multiple comments
It makes your blog look more impressive.
It may be higher than zero for a free low-skilled worker, but how much higher if its based solely on the market? RM0.50 - RM1.00 is not a bad proposal for the outcome of their wage, don’t you think?
If employers in Malaysia offer RM0.50 - why would anyone bother to work? Working may well cost more than RM0.50/hr. Yet, despite the lack of minimum wage, Malaysians (and foreigners here) make well more than, say, Botswana or Madagascar.
Singapore also lacks a minimum wage, yet wages are higher than in Malaysia for lower-end jobs - I know people working in 7-11 earning more than I get in pocket money.
And you ignore another fundamental flaw in your argument - there is little incentive for collusion amongst businesses. Just say there’s 100 maids and 100 households demanding maids. The maids, being human, have varying skills. If everyone decides in some meeting to pay maids, say, RM100 a month - what’s stopping 1 or 2, most likely even more, from paying more to choose the best maid?
“I thus would then like to ask him, realistically, how much bargaining power does a low-skilled worker have against his powerful employer in determining his wages?”
As long as a low-skill labourer maintains the legal right to leave for greener pastures - a whole lot more than slaves, definitely.
But the lack of negotiating power - is minimum wage thus becoming necessary? Neither me nor John is attacking the principle of providing living wages for the poor - just using minimum wage as a vehicle.
For example, would a 15-year-old working during holidays need the same wage as a 16-year-old pregnant high school drop out? What about a bored housewife in comparison with a father of 2 kids?
“Are minimum wages a ‘blunt instrument’? If we carefully set a minimum wage that takes into account the lowest-skilled worker’s abilities, one which adequately provides him with a decent standard of living and which enables him to provide for his family, then any other workers with skills set higher than that low-skilled worker should logically be paid higher than the minimum wage by his employers. If this is the case, then minimum wages only affects the lowest of the low-skilled workers, and no one else. So why is it a ‘blunt instrument’ then?”
Just because it is “carefully considered” or affects only a small subset of the population doesn’t change the bluntness of the policy - if I’m a single, high school drop out, do I deserve the same living wage as a single mother of two? Yet under every minimum wage regime on earth, the minimum wage for both me and that single mother is the same.
“Basing this next part of my argument on the 2006 Big Mac burgernomics chart here.
Australia has a minimum wage of about US$9.30/hour (AU$12.00/hour), and a Big Mac here costs US$2.67.
The USA, in comparison, has an average minimum wage of about US$5.15, so logically, this should mean that ceteris paribus it’s Big Mac should cost less. But yet, it costs US$3.22 there!
So much for the notion that neoliberal economies such as the USA’s results in lower cost of living. ”
You argued ceteris paribus - yet the American economy is vastly different from the Australian. American companies, for example, have to pay more in taxes. There is state taxes and federal taxes. And most Americans lives in states with substantially higher minimum wages than the federal level.
“However, his suggestion of why not raising the minimum wages up to AU$135 is when it starts distorting the aims of the minimum wage and thus making it into a ‘blunt instrument’. That’s because medium-skilled as well as some highly-skilled workers will still not command those sorts of hourly rates. So if the lowest skilled workers gets paid so much, either employers will no longer employ them, or those other 2 skills brackets of workers will demand wages exceeding that, thus artificially inflating their wage levels, increasing inflation and thus damaging their country’s economy.”
Yet why doesn’t this inflation occur when the minimum wage is set at AU$13? Magic? If the Singaporean government decreed that my current wages, S$8.18, is the minimum wage - by hell I would demand more than S$8.18 - why should I be paid the same as Johorean high school dropouts? And if SMU adjusts my wages to, say, S$16.36 - by hell would accounts assistants or clerks with diplomas be willing to be paid the same as college students.
Though not at the scale as AU$135, any minimum wage above equilibrium price causes inflation. The degree of it is another matter.
As for Noam Chomsky, he’s a linguist, not an economist. I can’t judge having not read his book, but I can make a judgment call on Chomsky - he found Pol Pot’s Cambodia and Mao’s China models for society back then, showing suspend of logic for ideology. And the excerpt you quoted claimed East Asia, which I assume includes its biggest country, China, to be the most equal - beggars belief considering the vast urban-rural rift in income, a rift not even countries like Brazil and Argentina can match.
And Brazil, in and until the 1960s, engaged in a vast program of import-substitution and fixed, over-valued currency - the very opposite of neoliberal ideals (though, at that time, not entirely un-American).
Comment by Rajan R — March 4, 2007 @ 3:19 pm