Founder Editor in Chief: Octavian-Dragomir Jora ISSN (print) 2537 - 2610
,
ISSN (online) 2558 - 8206
Contact Editorial Team RAFPEC The Idea
On the Minimal Wage, with Responsibility

On the Minimal Wage, with Responsibility

No. 7-8, Sep.-Dec. 2017 » Bridging News

The syntagm “minimal wage” used instead the syntagm “minimum wage” is intentioned and requires a little bit of explanation. “Minimum wage” is used in the labour legislation, and signifies the lowest level of the administratively established nominal gross monthly wage in the economy, warranted in paying. In fact, what the law establishes is not the minimum level, but the minimal one. What is that meaning? The minimum wage is the actual wage in the real economy, and thus a wage level generated by the labour market. As a consequence, the minimum wage can vary from time to time and also, of course, it can vary related to the administratively established “minimum wage”, but never below the last. As the administratively established wage must be fixed (at least until the next normative changing), it seems be clear now why this wage must be called minimal but not minimum wage.

What is (or must be) the nature of the minimal wage? Being established by the administrative norm, it cannot be directly derived from the economic logic. More than that, the economic logic reject, principledly, any rigidity of the economic variables, including the macroeconomic ones. So, it remains that the minimal wage cannot be legitimated otherwise than socially. More exactly, the minimal wage should be introduced in order to ensure the lowest level of social sustainability of the economy (for example, the subsistence level of income, or the “labour force replacing cost”) or even to ensure the lowest level of economic sustainability from the demand point of view (for example, the replication of the aggregate demand level). In the present intervention, this initial point of introducing the minimal wage will be ignored. I’ll consider this initial point as if it verified some rational conditions which are, however, for the moment, out of my interest here. The question which has, instead, to be put from this point on is: how, i.e., based on what rationality, the minimal wage should be changed over the time by the normative authority? Therefore, I’ll examine only this issue.

It is of a great relevance to identify some logical anchors for the minimal wage changing.

  • since the minimal wage is “produced” in the economic process, its changes should be based on that economic process fundamentals – more exactly, the minimal wage changes should follow the objective (i.e., without any relationship with the normative authority) changes of the given economic process;
  • since the minimal wage will act over the entire economy, the methodological anchor for its changes must address the macro-economy, so the fundamental variable chosen to drive the minimal wage changes must have relevance for the national economy as a whole;
  • since the minimal wage, like any administratively established price, necessarily generates gaps between the demand and the supply of the “good” whose price is established (in our case, between demand and supply of labour), the methodological anchor chosen must avoid, as much as possible, the emergence of such gaps (since the minimal wage is higher than the equilibrium wage, the gap would generate unemployment);
  • since the minimal wage cannot be, principledly, reduced (primarily for political reasons), the methodological anchor chosen must initiate a positive feed-back related to the minimal wage, so any new level of the last become sustainable in itself.

It is not needed to search too much to find the best candidate for such a methodological anchor, i.e., the one that verifies the four logical conditions above mentioned. This is, of course, the “labour productivity”. Although other macroeconomic variables (like economic growth, economic competitiveness, or economic sustainability) could (or even were) be proposed, it is easy to show that labour productivity is, causally, more primitive than any of them, so any of them can be derived from the labour productivity.

  • in the Cobb-Douglas function, economic growth, which combines quantities of capital (in fact, capital goods, in Mises’ terminology) and labour, labour productivity is implicit just by the fact that labour is combined with capital (, where is GDP,  is capital,  is labour force,  is the GDP elasticity in relation to capital, and  is the elasticity of GDP relative to labour). Therefore, the increase in labour productivity is a direct cause of economic growth, which means, logically, that economic growth is implied by the increase in labour productivity;
  • economic competitiveness by price (in fact, by cost) is also logically and causally contained in the labour productivity: indeed, an increase in labour productivity means an increase in the quantity produced from a good or service by an employee. As a result of the economy of scale, the average total cost decreases with the increase in labour productivity (i.e., it decreases proportionally with its increase). As a result of the decrease in the total average cost, the price may decrease without reducing the profit margin (thus, without worsening the market position of the firm). But lowering prices means just increasing economic competitiveness;
  • the sustainability of economic growth is probably the most important macroeconomic indicator that should be taken into account in setting the minimal wage level. However, the sustainability of economic growth is, in terms of causation, contained in the concept of labour productivity. Thus, if through sustainability we understand the ability of a system to replicate itself (to resume its activity at least at the quantitative, qualitative and structural previous level) then an increase of productivity is a definitive, structural “acquisition” of the economic system in question. As a structural parameter, the labour productivity ensures with necessity the resuming (replication) of the economic activity at least at the previous level. Therefore, taking into account the labour productivity as variable of methodological anchoring of the minimal wage variation implies, logically and causally, the assurance of the sustainability of the economic growth.

However, the logical conditions (c) and (d) need some supplementary comments.

Regarding (c) logical condition, the labour productivity substantially diminishes the risk of generating unemployment for a very simple reason: increased labour productivity leads to an increase of the equilibrium wage, approximately with the same size with which the increased labour productivity leads to an increase of the minimal wage (taking into account that the nominal wage is the monetary value of the marginal labour productivity). So, the potential of the minimal wage to generate unemployment is either considerably reduced or even avoided.

Regarding (d) condition, an increased minimal wage will act on the employees like an efficient wage, so the employees affected are stimulated to increase their productivity in order to keep the new increased minimal wage. So, a positive feed-back is initiated: increase of the labour productivity leads to an increase of minimal wage which, in its turn, leads to an increase of labour productivity and so on.

We can conclude now that the fundamental macroeconomic variable which is in the best position to anchor the minimal wage increasing is the labour productivity.

 
PRINT EDITION

SUBSCRIPTION

FOUNDATIONS
The Romanian-American Foundation for the Promotion of Education and Culture (RAFPEC)
THE NETWORK
WISEWIDEWEB
Amfiteatru Economic

OEconomica No. 1, 2016