20 arguments against minimum wage

During the last two weeks, negotiations have been held between the Bulgarian government and the mission of the International Monetary Fund (IMF) concerning the increasing of the minimum wage in 2005 from 120 to 150 levs (from EUR 61.4 to 76.7). Purposed at this are 20 arguments prepared by the Ministry for Labor and Social Policy (MLSP) experts who support that demand [1] . Here, an alternative position against minimum wage is presented trying to follow the same order as it is in the original document.

1.       Currently, minimum wage level is too high because it should be abolished. The presence of such a minimum impedes the free labor negotiations between the employer and employee. When such restrictions exist this distorts the information transmitted through labor price as these information signals for prices under the minimum cannot be transmitted to the business and to reflect the demand for and supply of labor.

2.       If minimum wage is abolished Bulgaria would enter the European Union with more flexible labor market because minimum wage is an impediment to its free functioning.

3.       Minimum wage is the only tool of the Ministry for Labor and Social Policy to affect the labor market and its abolishment would deprive it of discretional power. There is a great number and kinds of programs for people with low or zero income which are sufficient tool for influence.

4.       Minimum wage should not be used for social purposes. When an employer hires a worker he compares the marginal cost with the marginal revenue of it. The social meaning of this is that he/she could hire the worker and enable him to generate income but above some level it would not happen. Then, government should provide the entire size of the social minimum instead of giving some sort of additional payment in order to assure it.

5.       Minimum wage and its growth create a higher risk of unemployment because when the marginal costs per worker rises and the marginal revenues are constant or fall then the employer will simply hire fewer workers and thus the employment will be smaller than the case when there are not such wage restrictions.

6.       Price of labor in Bulgaria is low and it is one of its few competitive advantages. When wages rise faster than the labor productivity, competitiveness is reduced leading to less foreign investment fewer jobs and lower living standards.

7.       That is why the only reasonable thing is to link wage and labor productivity i.e. when labor productivity does not rise then minimum wage does not rise either.

8.       Share of workers receiving minimum wage in the public sector is small but its increase would cause additional budget costs. This money is taken from the private sector where they could be used more efficiently and to add more value. Hence, the loss for the society would be greater.

9.       An minimum wage increase of 30 levs leads to 40 levs increase in employer’s costs i.e. there is a negative multiplication effect from it.

10.   Lower labor costs are one of the main factors in attracting investors because the infrastructure, property rights, regulations, relations with administration and the other indicators that influence the size of investment have rather negative effect.

11.   Bulgaria is competing with all other countries to attract investment because the degree of international integration is rising. Therefore, the conditions for making business among which is the minimum wage and its size should be compared not only with these in the EU but also in any other country.

12.   higher minimum wage would cost to the state budget “only 20 million levs” but the private sector costs would be much higher. Analyzing such a measure, we should take into account the whole effect of it not only its impact on the state budget. this effect includes cost-benefit analysis of adoption or amendment of particular regulation which can convincingly prove that the total benefits for workers, businesses and budget would excess the costs. However, such measure would distort in greater extent the negotiation process between worker and employer would contribute for increased total loss for the society reflected in lower employment and fewer goods and services produced and hence lower income and living standards especially for low wage workers who would have to be advantaged of such activities.

13.   Following the above arguments, more funds would be taken from the real economy, which, in turn, would probably lead to loss of productive jobs. Of course, government could try to offset this loss by creating more inefficient public sector jobs.

14.   According to the MLSP estimates, these funds would equal 68 million levs which is not a small sum having in mind that these costs arise from an amendment of only one regulation. This money is burden not only to business but also to workers who, ultimately, pay the bill. However, related to the joining of Bulgaria to the EU amendments in existing or adoption of new regulations is imposed that additionally increase the burden on the business. In such case, economically unjustified change in regulations not related to the EU becomes even more harmful resulted in an accumulation of requirements that are harder and more expensive to fulfill.

15.   Higher minimum wage would not solve the spare jobs problem because if employers assessed that they could pay for a particular job less than 150 levs they cannot change their assessment because of the amendment in a government regulation. This job would not be occupied but just removed but this is not a way to solve the problem and, in fact, it creates even graver one.

16.   Higher minimum wage would contribute to larger size of shadow economy as some workers and employers would rather prefer to continue their relations with wage smaller than the minimum and this largely concerns the wages between 120 and 150 levs.

17.   Minimum wage is harmful for low productivity workers, for young people who wish to start working, for some disabled persons and, in fact, for the most vulnerable social groups. Such persons would be hired hardly and it becomes even harder with the higher minimum wage size. Thus, they cannot become experienced or achieve skills, which can be useful to increase their productivity and be more competitive on the labor market.

18.   Minimum assurance thresholds to a great extent have the same effect to the minimum wage as in many companies they are used as a compensation minimum and this is another reason for the minimum wage abolishment.

19.   The change in minimum wage would not affect positively employees with higher wage than 150 levs but, on the contrary, it is possible when cost for low productivity workers rises the number of high wage jobs to decrease.

20.   Workers with wage of 150 levs would receive the minimum and this can discourage them because the evaluation of their efforts would seem relatively lower.

As a conclusion we can say that the only reasonable decision for the minimum wage is to be entirely abolished because of the significant negative effects that it causes on the whole economy and especially on the labor market.

 

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