Are the Proposed Minimum Wages Too High?

By Ghassan Karam

Minimum wages have always been very controversial and chances are that they will always be so. The idea is so contentious since it deals with one of the most sensitive ideas of a market economy, that of Laissez Faire. Is there room for government regulations and how much government interference is acceptable is at the heart of this issue?

One school of thought in mainstream economics, the positivists, refuses any kind of government regulation as being ultimately ineffective. They simply maintain that a society must accept what is, the market dictate. The opposing view, represented by the normative school, argues for what ought instead of what is. Members of this school of thought admit that a market economy faces many market failures and the only way to correct for these failures is for the Government to interfere and force the markets to change their behavior into what ought to be. It is clear that the second school is built on subjective thinking since what is, say, equitable to one might be inequitable to another. Let it be said though that market failures are not a theoretical construct since one can point to any number of such instants. In a sense all prices are not the real prices since the cost of externalities is never internalized fully by any supplier and thus the point of equilibrium is never the true efficient one. That is the whole idea that was initially advanced by Pigou and has become known as Pigouvian taxes.

As controversial as minimum wages are yet the arguments on both sides are rather simple and straight forward. Those that favour minimum wages argue that free markets are best at allocating resources and that government is not in a position to make such judgment. They argue that minimum wages end up in hurting those that they are planned to help; the poor. There are many studies that support this point of view by showing that job losses more than compensate for the increase in wages.

The arguments on the other side are just at straight forward but in my opinion more convincing. They rest essentially on two pillars:

(1)    Moral: No one should work when the rewards would not lift one from under the official poverty line. These are the ideas that have become called “living wage” and that are often supported by ones view of what ought to be considered as fair rewards.

(2)    Economic: Labour markets are neither homogenous nor perfectly competitive. This means that the simple textbook model of supply and demand that the positivists depend on is not applicable. It is easy to show that in imperfectly competitive markets a higher wage could act as an impetus for greater productivity and thus even more employment. The great majority of labour case studies support this argument.

The above presentation is meant to show that almost all over the world governments have sided with the normative school of thought by mandating a minimum wage rate. This however does not imply that government has a carte blanche at setting any rate it chooses. Obviously if the minimum wage rate is to have any meaning then it should be above the minimum market rate but it should not be set at a level that would become counterproductive by choking off hiring and reducing the competitiveness of the affected industries. And so the real question is how high these rates should be? Unfortunately there is no set answer for this question although there is some rough evidence to where it normally is set. A quick review of the minimum wages all over the world reveals that they are usually related to the level of economic development of the countries in question. As a  general rule the industrialized countries tend to have a higher cost of living ,a relatively high GDP per capita , a higher absolute minimum wage rate but that rate usually replaces a low proportion of the GDP per capita. In most of these major countries the minimum wage represents less than 50% of the GDP per capita: USA 33%; Germany None; France 53%; Japan 35%. Only the least developed and the poorest countries have adopted a wage rate that is either close to or even higher than the GDP per capita: Ethiopia 95%; Benin 108%; Burkina Faso 133%   .

So where should the level in Lebanon be and what do the world levels say about the recent controversy that was set by the new minimum wage adopted by the council of ministers? The best judgment is to take a look at the group of countries that are in the same group of GDP per capita:

Country               $ GDP/capita          Min Wage as a % of GDP/capita

Hungary………………13,000………………………………..34%

Poland…………………12,300………………………………..45%

Uruguay………………12,000………………………………..23%

Chile……………………11,800…………………………….…..38%

Lithuania…………….11,000…………………………….…..35%

Libya………………….10,800…………………………………13%

Brazil………………….10,800…………………………….……37%

Latvia………………….10,700………………………….……..37%

Russia………………….10,400………………..……………….19%

Turkey…………………10,300…………………..…………….57%

Venezuela……….…..10,000…………………………………60%

Lebanon…………..10,000…………………………….70% (based on the new proposal of $576 per month)

Mexico………….……..9,500…………………………………..13%

Argentina……… .……9,100…………………..………………63%

Kazakhstan…. .……..9,000…………………………………..12%

Gabon…………..……..8,800…………..………………………27%

Costa Rica…………….7,700………………..…………………36%

Saudi Arabia………..7,600………………………………..33%

As the upper table makes it abundantly clear the Lebanese proposal would make the Lebanese minimum wage represents the highest such wage rate in the world. Actually had it not been for Argentina, Venezuela and Turkey the Lebanese rate could easily be judged to be twice the global average for countries at its level of GDP per capita. So even if one is to be progressive but yet realistic it is abundantly clear that the Lebanese minimum wage rate should be scaled back to at least $500 per month. That would still keep the Lebanese rate as the second highest in its group of countries, barely behind Argentina. Any rate higher than that would be irresponsible and will NOT help either the country or those that it is intended to favor. The government has many other tools that it can apply to improve the level of welfare of the poor besides a forced unrealistic minimum wage rate. It is one thing to be progressive and it is another thing to be suicidal.