Academic journal article World Review of Political Economy

The Income Effect of Minimum Wage for the Underclass

Academic journal article World Review of Political Economy

The Income Effect of Minimum Wage for the Underclass

Article excerpt

1.Introduction

Since the first law on minimum wage was enacted in New Zealand, 1894, more than one hundred countries have followed up and adopted this labor market regulation, including almost all the developed economies (except for Singapore) and a majority of the developing economies (Ghosheh 2013). In contrast to what seems like an international consensus among politicians, the academic debates concerning the validity of a minimum wage policy went on for decades among economists. In 2014, economists in the United States have, once again, formulated two opposing camps, discussing whether there should be another raise in the federal rate of minimum wage. Organized by the Economic Policy Institute and the Employment Policy Institute, both sides have released their own open letter stating their views and arguments, which at one point almost turned into an ideological battle, with two Marxists claiming to have experienced the McCarthyesque tactic of "red-baiting" in this minimum wage war (Matthaei and Zarembka 2015).

The first officially implemented wage system in People's Republic of China was established in 1956, giving the Chinese government full authority to determine national wage rates based on occupations and their political rankings in the bureaucratic hierarchy. Since the Opening-Up Reform in 1978, the Chinese labor market has been increasingly liberalized, which gives rise to the necessity for the government to rely on the minimum wage law to protect the legitimate rights of the underclass to get reasonable payment for their work. In 1993, the Ministry of Labor and Social Security drafted the "Minimum Wage Regulations," introducing the first minimum wage standard in China. The Labor Law of 1994 further recognized minimum wage's legal standing, but it was not until 2004, when a revised and updated version of the "Minimum Wage Regulations" was issued, did this policy begin to take true effect in practice and become sufficiently enforced in the shop floor. Although the minimum wage policy has long been acknowledged as a basic component of the official social security system in China, some Chinese economists such as Steven Ng-Sheong Cheung still criticized it as the "bane of the Chinese economy," debating its economic implications (Cheung 2004).

For decades, economists have emphasized minimum wage's possibly negative impact on employment, but the main motivation behind its enforcement is to protect unskilled workers employed in the labor-intensive industries and to ensure that their income level can keep up with how fast the inflation rate and the basic living expenses are growing. Therefore, although minimum wage's employment effect has become a standard topic in economic theory, the income effect is the key to unraveling its practical implications. The minimum wage policy influences people's income by affecting both wage rates and labor demand. In the Chinese labor market, unskilled workers are highly homogeneous, constantly flowing across regions and industries, and often work excessively long hours as firms seasonally require (Fang and Dewen 2003). What is enacted in law as the minimum rate of wage has nowadays increasingly become the standard rate in labor-intensive industries. The low hourly wage rate has made overtime work a rigid demand of unskilled workers, giving rise to a new form of control mechanism available to factory managers (Ngai and Chan 2012). These specialties of the Chinese labor market suggest that the major impact of the minimum wage policy is on the length of the working day, not the unemployment rate. Even when a raise in minimum wage decreases firms' labor demand, which as analyzed below happens only conditionally, it does not necessarily result in permanent/long-term unemployment for some people. Rather, it might only result in a smaller demand for overtime work, so that the main question to be answered when evaluating the implications of minimum wage policies is, after all, whether or not it can increase the income of the underclass. …

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