Published On: Mon, May 12th, 2014

A few things you might not have known about minimum wage laws

Curacao statisticsDid you know that the minimum wage law, despite the fact that it is being presented as an instrument to raise social equity, is historically in fact a strategic maneuver from trade unions to limit competition from cheap labor? By lobbying the government to mandate a minimum wage, all those with skills that do not justify the minimum wage salary simply do not get a job, and that is precisely the intention. All the labor demand is thusly funneled to the trade union members, who, as the established worker class and as they manage to limit entry into the market, see their own incomes rise. So being, the available job slots are filled by them rather than hiring for example a low skilled individual who requires extra training and attention to bring him up to a production level commensurate with the minimum wage.

But we so often hear that a minimum wage salary is not enough to attain a basic level of subsistence. To this common argument I would like to make three points:

1) It is very easy to look at people who already have a job and say they earn too little and that the minimum wage ‘protects’ them from further exploitation. This argument fails to point out that there is a much larger group that is being disadvantaged; namely all those of low skills and doubtful credentials who did not get a job thanks to the minimum wage. Unfortunately, these people typically do not know why they do not have a job nor does popular discourse allow for a more profound scrutiny on the merits and pitfalls of the minimum wage.

2) Getting a job that pays below the minimum wage does not imply that the employee will stay at that level forever. In fact, it gives them the opportunity to acquire crucial skills and attributes such as getting to work on time, taking orders, giving orders etc. As their skills and attributes develop, so do their chances for effectively competing for a better job on the market. Low paying jobs are a stepping stone to higher productivity, not a permanent position.

3) With circumventing legal constructions, many in Curaҫao in fact do work below the minimum wage. Take for example the work of grocery bag helpers in supermarkets or toilet ladies at nightclubs. Both are not directly hired by the company since that would entail all the concomitant labor laws (social premiums, minimum wage, regulation that effectively prohibits people from firing laborers unless they go through long bureaucratic processes etc.). These jobs, if one calculates the hours spend per month divided by the income in the form of tips, are typically at roughly the same level as the minimum wage, if not lower. The same can be said about street level drug dealers who have to occupy their spots for hours at an end on a daily basis. All of the above examples indicate to me that people are indeed willing to work for wages which are below the minimum wage, regardless of what remote bureaucrats and the economically naïve might think when they ‘calculate’ what the minimum wage is that people need to attain a subsistence level.

The minimum wage has yet another disastrous effect; for the employer, it reduces the costs associated with indulging in one’s personal social preferences and prejudices. I will illustrate this using a short example:

The owner of a small restaurant is looking to employ a security guard for the parking lot and receives two applications. The first application is from individual ‘A’ who has established worker credentials and positive references from previous employers. Application ‘B’ comes from an individual who has all the stereotypical attributes that people typically associate with a ‘liability worker’. Since the law dictates that the restaurant owner is required to pay both A and B the same wage, the restaurant owner is naturally going to opt for worker A of proven credentials, as it entails a lower risk. The owner is thus using his personal preferences and prejudices to guide this decision. Meanwhile, worker B stays out of the market for a few more years and is forced into the shadow economy. Worker B, who operates in the shadow economy, repeatedly comes into contact with the law. At a later point in time worker B gets two children and passes through several parasitically subsidized foundations that ‘rehabilitate’ ‘problematic’ people. Only after this, ten years later, worker B re-applies at the restaurant owner for a similar job. At this point the restaurant owner figures that, because of the fact that worker B has two children and has passed through several rehabilitation programs it is quite likely that worker B has too much to lose by being a liability worker. Thus, worker B gets the job as a security guard at the restaurant at a minimum wage, ten years later... The alternative to this of course would be if there were no minimum wages. Then the restaurant owner would evaluate worker A and worker B and in some cases decide that the lower price offer -which is the only tool worker B can use to compete with worker A at that point in time-, justifies taking worker B for the job. In a world without minimum wages worker B would be accepted on the job at a lower wage, acquire the skills and attributes and within a few years can advance his own career with the newly gained credentials.

In Curaҫao we typically tend to phrase the story of worker B as: “after many years of being a thug, worker B has decided to become a serious person and work legally” whereas we fail to recognize that the minimum wage is what pushed him into the shadow economy in the first place. Though it sounds counter-intuitive, minimum wages are by far one of the most destructive economic policies ever devised. Low skill laborers and liability workers are all priced out of the market to benefit the established working class, such as the trade union members whose work can no longer be delegated to cheaper alternatives thanks to the minimum wage laws. In addition to all of this, many ‘simple’ jobs, such as ushering people to their seats in the movie theater disappear since no employer is going to pay a minimum wage for such trivial tasks. Some prominent members of Curaҫao society such as Jacob Geltdekker have already pointed out the disastrous effects of minimum wages and its direct relation to crime rates, but to no avail. It is time that we recognize the root problems for what they are; rather than finding ways to rehabilitate people that come into contact with the law due to their economic activity in the shadow economy, it is time that we should be absolutely frank with ourselves as to what exactly is driving people into the shadow economy. Abolish the minimum wage laws.

Written by Dennis Arrindell

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