Minimum wage is the least amount of monetary reward that an employer is obliged to pay to its workers irrespective of their productivity levels. But, can minimum wage be justified? Why should an employer pay wages which are higher than the productivity levels of workers? However, is it again fair to suppress workers to a low market wage which does not even let them cross the poverty line? Furthermore, should the minimum wage be adjusted so that the real wage does not get eroded over time? These are the questions for a debate.
The issue of minimum wage has seen a lot of debates around the globe. While the salaries in government jobs have been fixed with little to no annual adjustments, the private payments have been largely based on personal judgments in Nepal. Some of the countries around the globe like United States have minimum wage laws that prohibit the employers from paying its workers below the prescribed minimum wage. There seems to be a long way to go before any such laws could be established in Nepal. However, is it worth the effort to bring minimum wage legislation into effect in Nepal?
The proponents of minimum wages argue that to let the lower income groups come out of poverty trap, there has to be a minimum wage. We all have seen the unskilled workers languishing in abject poverty in Nepal. Continuous work of 8 hours does not earn enough to sustain the life of thousands of Nepalese. We not only need higher wages but also a continuous adjustment on the wages. The supporters of minimum wages believe that there has to be a continuous change in the minimum wage so as to adjust for inflation. Many times, there are cases that the workers do not get fair compensation from the employers. Sweatshops exist in many places. Various factors affect the wage levels like productivity levels, demand for workers and so on, but from a moral viewpoint, the workers should be able maintain a decent standard of living from their earnings.
However, the employers are not willing to pay more to a worker if they think that they can hire many other workers at that wage. This problem has been further aggravated by the continuous rise in the population. The rate of increase in the number of people seeking work is very high in Nepal. As per the CIA fact book, the 2001 unemployment rate was tremendously high at 47% in our country. Hence, the employers are left with a large supply of workers. Economic principle holds that higher supply leads to a lower price, given other variables remain constant. So, the workers are left with no bargaining position. They are subject to lower wages and yet, they cannot demand higher wages for they fear losing the jobs to other people.
To add to the woes of these poor workers, there is a pressure from the persistent rise in prices, popularly known as inflation. As per the World Development Indicators, the consumer price measure of inflation stood at 3.0% in 2004 while it was at 6% in 2003. This has lowered the purchasing power of the wage. This means that the workers can buy less goods now then they could buy years back with the same amount of money. Hence, it leads to a fall in the living standard of the workers. It we were to sustain the purchasing power of the wages, they would have to be increased tremendously
But, the world is not that simple. The proponents of minimum wage have failed to realize that higher wages do not come alone, with higher wages comes the higher price for the products that are produced. The cost of production goes up with the rise in minimum wage. The failure to raise the productivity of the workers to the wage level is certain to rocket the prices. Would an unskilled worker be able to do the work more efficiently if the wage is increased to 10,000 Rs. a month? Definitely not. So, ultimately the people have to suffer higher prices which might negate the effect of higher market wages.
Not only will there be effects on prices, but also disastrous effects on the employment as a result of the minimum wage. The basic economic argument claims that a rise in wage level cuts off the number of those employed. This is due to the fact that employers do not find some of those less skilled workers worth hiring at the higher wage rate. The employers will cut the number of workers working for them. Hence, the lower demand of low-skilled workers is sure to worsen the lives of those who may get fired from the work. And, the ones to get fired are those who do not have good skills.
And thus, by setting up a minimum wage, rather than benefiting the workers earning less, they are made worse off without employment. Those workers who are supposed to get higher wages as determined by minimum wage are likely to lose their jobs as many of them do not have many skills. Establishment of minimum wage does not have much impact on those who are skilled. Minimum wage rather helps those who have sufficient skills as they can retain their jobs even at the higher wage rates. Therefore, minimum wage is bound to benefit the skilled workers at the expense of the less-skilled ones. Furthermore, employers are likely to outsource the jobs to foreign workers who are willing to work at a lower wage. So, it further aggravates the employment problem.
Training the workers may be a good idea especially in the case of our country to solve the issues of employment and wages as training can raise the quality of the work. Higher quality of work means the workers are likely to get higher wages. The firms may not be willing to pay for the training of the workers as they can hire trained workers, but they would have to pay more to the trained workers. Thus, it may be beneficial for them to train their own workers who are loyal to the firm, thereby saving hiring costs. They can also avoid the potential risks associated with new employees like high labor turnover.
There are both sides to the coin. Minimum wage can help check the monopoly power, the power through which the employers can solely determine the wage rates. However, minimum wage unnecessarily raises the price of a product as there will be inefficiency in production. Moreover, the effect of minimum wage on employment of low-skilled workers is even more catastrophic. So, it may be a good idea to train workers so that they can become more skilled and subsequently be able to bargain for higher wages rather than think about establishing minimum wage in Nepal.