Saturday, August 8, 2015

When Minimum Wage Backfires

Case #1: Walmart

Walmart raises the minimum wage for its employees to improve worker morale.

However, the opposite effect has taken place. Current senior workers who have been working for many years have suddenly realized that brand-new employees with no experience or knowledge would be getting salaries similar or slightly below them.

Many senior employees are extremely dissatisfied and feel like their contributions and efforts over the years are being under-appreciated.

Case #2: Gravity Payments (Source 2)

COE decides that everyone in his company should have at least an annual salary of USD $70,000.

The people in the most senior positions got small or no pay raises, while the people doing the jobs with the least amount of skill required and no experience had their salaries doubled.

Feeling that new policy was not fair, some key members have left the company.

New people hired to manage the additional work cost substantially more given the minimum wage set by the company.

Customers that did not agree with this "political" statement have stopped working with them.

Other customers do not believe that the company's business model is a good one and have left due to future expectations of higher service fees by the company.

Personal opinions:

I am not a big fan of the minimum wage. I'm more like a USB-powered mini fan of it. Useful in some situations, but not most.

As a citizen, I understand that the government has to somehow ensure that the low-skilled citizens are able to get jobs because it can become a social issue, even though it is an economic drag.

As a human being, I don't think that 2 people doing the same quality of work should be paid differently because of whatever.

I think that regardless of being a man, woman, young worker, old worker, citizen or foreign talent, salary ought to be paid based on quality and other work-related factors. However, that is just what I would like to imagine it would be like in my imaginary world. In this imperfect reality that we live in, there will always be discrimination.

Don't be confused and look at the perfect theoretical outcome, but rather look at what is the best practical situations in reality now. Discrimination is of course not ideal, but as long as it exists in society, there should be a way for people to deal with it and overcome the hurdles that it places in front of those people.

For people facing discrimination in the labour force because of whatever reasons such as, education qualifications, having ovaries, physical handicaps, social disorders, different race, different religion, plus sized, unpleasant looking, body odour etc, their only tool that they can use to bargain for a chance to prove themselves is their salary.

A minimum wage effectively places a lower limit to how much they can bargain, and it restricts their ability to fight back and prove that whatever nonsensical prejudice is being held over their head is exactly just that.

If the minimum wage is so awesome, why is it $1,000 a month? Why not $1,500 a month? Sounds okay right?

What about $2,500 a month. Or $3,000 a month? Do you feel slightly uncomfortable now?

I still believe that the current PWM is a minimum wage, but I concede that it could be justified if wages are indeed being suppressed and are not adjusting as quickly as compared to the free markets or if they are engaging in social engineering. If it is the former, then it seems that somehow our government has found a free market mechanism that isn't prices. I don't buy it, however I'll just go along with it. The way I see it, the government is just taxing the companies that hire these people in order to create social stability. It don't know whether it's a good thing or a bad thing, but it sure must suck being a business owner with that sort of hiring requirements. However, it could be the latter since the economic optimal point may not be at a socially optimal point. This clearly can exist, which is why housing policy is not a complete free market. There is an economic drag, but the social benefit outweighs it. The issue here is if their policies of social engineering is going to have the correct positive effects that they were aiming for.

Somehow or rather, we seem to be slowly morphing into a communist socialist country where everyone feels special and entitled and that the government should look after them. Happy SG50 everybody.


  1. hey there, GMGH!
    i, too, am not a fan of minimum wage... hehe, so you're a USB-powered mini fan? let me think, then i must be one of those battery-operated super weak fans!

    regarding PWM, i believe the situation of suppressed wages in the cleaning, security and landscaping sectors can be traced back to outsourcing practices. sadly in many cases, outsourcing = cheapsourcing. whenever contracts are up, new tenders put up, and contractors would bid for the jobs. for many years now, lowest bids win in most cases. this gives zero incentive to the contractor to spend money doing any sort of training or investing in more sophisticated machinery and equipment. and with no improvement in productivity whtsoever, service buyers also see no reason to pay more. so the vicious cycle of granting contracts based on price just goes on and on.

    the workers suffer as a result of such cheapsourcing practices.

    i'll share a real life example. Uncle Ben works as a security officer at a condo, and his pay is, say, $1,500. he's under Contracter ABC. when the contract ends, Contractor XYZ wins the new contract coz he undercut ABC. so what happens is XYZ goes to all the existing sercurity officers in the condo, including Uncle Ben, and ask if they want to continue working at the same condo, but at a lower pay of, say, $1,450. XYZ will explain to them that XYZ has no choice coz they have to undercut ABC in order to win the contracts. so it's a case of take-it-or-leave-it for the security officers. most would choose to take it. so when the time comes, they will just put on XYZ's uniform and just carry on with their job.

    so you may see Uncle Ben working at your condo for 3,4 years.... but the ugly reality is instead of seeing his wages go up, he may be earning less at his fourth year with the same condo. very sad, but that's what's really happening on the ground.

    you see why NTUC had wanted to fight for PWM so badly now? there's no way the workers can pressure the businesses to give a higher pay, so the only way is to get the government to do it through some form of legisltation or licensing requirements.

    but setting a minimum pay will only solve one part of the problem. the workers still don't get any skills upgrading, so they will not be able to progress. so NTUC also works through e2i to provide productivity grants to businesses (contractors),

    in the case of cleaning sector, cleaning contractors may apply for productivity grants to invest in high-tech cleaning machines. in return for the grant, they must send their staff for training to operate the machines. at the same time, investing in the machines often means they can bid for more jobs/contracts, and due to some of these multi-location jobs, some cleaners with leadership potential may also be promoted to team leaders to help with supervisin, rostering and other job.

    when e2i works through the grant application with the cleaning contractors, they would often stipulate a pay increase for the cleaners because the cleaning contractors would usually see productivity gains which bring higher profits. e2i will ensure that the gains are also passed on to the workers.

    1. Hi BB,

      Cheapsourcing itself is not wrong. If there is no improvements to quality, and other contractors are profitable at a lower price, shouldn't the cheaper contractor rightly win the contract?

      While $1,500 might have been the market rate when the first contract started, $1,450 might be the new market rate now. The people / company offering to doing the same quality of work offered at a cheaper price should get the job, right?

      The real life story you shared is a good case study. If the contractor's company is unable to increase prices and must instead lower prices to remain competitive and in business, it is natural to look into the cost inputs for areas to trim. Having a $50 pay cut is better than no job, right?

      I think it is a false relationship to link specific job salaries to general rise in cost of living or wage growth. If an industry is undergoing massive change, certain jobs 3-4 years ago may not be worth as much as they are today. With cheaper technology for security systems with higher capabilities (many new homes now even have their own security systems) and low crime rate, it is not possible for cost of security to trend downwards?

      If certain job in certain industries have more than average wage growth due to surge in demand and scarcity, is it also not possible for other jobs in other industries to have lower than average wage growth (or even stagnant or negative growth) if these jobs have more than ample supply?

      The biggest problem as you mentioned is, how will Uncle Ben boost his productivity? Jobs can go extinct and that is not unheard of, street lamp lights, delivery milkmen, bowling pin setters... He may have to upgrade his skills and find a new job.

  2. In this world, the weak will always remain weak as the poweeful ones will always maintain their supeeiority n give reason why this and that cannot.
    If u feel wages ahould be kept low becoz the value of their work is well low. Ok then. Who define what is low and what is high.

    Walmart case. Management should also increase the senior staff salary not just junior. To maintain to the experience scale pay grade.

    The 70k minimum annual salary i applaud. But it sounds a very politicall reaction against the ceo to prevent this policy from being successful. To maintain the power equilibrium. Coz if this company succeed, every oyher companies will face the problem. They can nvr answer that it is impossible to do so. At the top, bottomline is the priority at the expense of the bottom workers. This structure must be protected.
    Remember. For every 5 or 10 ppl at a work site. 4 or 9 is supervising or eye power. One is doing the actual work. And that 1 is the bottom staff. Who reap the returns. The one at the top. Its a pyramid.

    And yes of coz its s minimum wage but it cant be say is a mw but a progressive wage. Mw was denounce. So paiseh if suddenly say ok we need a me.

    1. Hi Anon,

      Obviously the weak should be less superior than the powerful. Isn't that the definition in the first place. Should the weak be powerful and should the powerful be weak? That just doesn't make any sense.

      If you are top salesman in the company, should you be less awesome and give accounts to your lousier and weaker colleagues so they can also earn more and you can earn less? Should the powerful not try and maintain superiority?

      I'm not saying wages should be kept low. If someone else is willing to work for less and do the same job with the same quality, that means the company is paying too much. The market defines what is too low and too high. A job can pay you "low", but it cannot pay "too low"? Of course not, because if it is "too low", the person wouldn't do it. That's the definition of "too low".

      If not the market to decide what is too high or too low, who should it be? The government? To arbitrarily sets numbers? The labour market already takes into account things like market conditions, job stability, prospects, working conditions and countless other factors and pumps out a number.

      Who doesn't make $70k minimum. I will also applaud if I am in that company. I will also applaud if it works, but I doubt so. The bottomline is the priority for companies that operate for-profit. Companies don't exist to give charity and do profit-sharing with their employees. If so, then employees should do loss-sharing as well. If they the company makes negative profit for the year, then they should return part of their salary? Of course not, right. Expecting upside with no downside is just greedy.

      I don't know how you get your 10-20% doing all the actual work, but that isn't my experience. It is more like 10-20% are doing the eye power.

  3. Hi GMGH,
    Nice article.
    I am a slightly bigger fan of minimum than you and a few other people who have commented here.
    I totally agree with your points about skill upgrading & being relevant.

    So let me put a counterpoint, if a job is not relevant or is not needed why is the Job there in the first place.
    If a person is needed for the job means the technology has not yet reached a point where it can replace humans ( which has happened in case on telephone operators, Bowling pin setters, etc.).

    Next, about the point that there cannot exist a job which has a salary which is very low, but sadly that is the situation in Singapore.
    People who work 12 hours a day for 6 days a week, deserve to earn adequate amount to live a life where they can have 2 square meals and other basic necessities of life.
    If our society cannot guarantee such privileges to hard working members of society, then can we really call our ourselves as developed society.

    "A nation's greatness is measured by how it treats its weakest members." ~ Mahatma Gandhi

    The question to be asked is whether we are satisfied with being a pragmatic society or we want to be a great society.

    As a share holder of the company I would like it to earn max profits, but I would also want to live in a country with happy people.

    1. Hi GP Blogger,

      If a job still exists, it means that technology has yet to be developed, or has yet to be cheap enough to replace human labour. However, if tech cost drops and the quality of output that the tech can pump out is better than humans, it would be almost certain that such jobs will be slowly phased out eventually.

      I know that in Europe where manpower costs are high due to minimum wage, fast food outlets have started to roll out machines to take orders instead of human cashiers. The McDonald's at Raffles City also has this. When implementation costs crosses under and become cheaper than human costs - regardless if it is due to rising wages or cheaper tech - the replacements will come.

      Those that work 12 hours a day for 6 days ought to make enough to survive, and ideally with government assistance provided as well. The FWL, Quota system and Workfare are all policies that the government has rolled out to show bias towards Singaporeans.

      However, sheer hard work by itself (large quantity of inputs / effort) does not necessarily equate to better payoffs. As a meritocratic society, we are judged based on the output and results. The student that studies that most isn't necessarily the top student. The student that gets the most A's becomes the top student, even if he didn't study nearly as hard. The salesman that works the longest hours and make the most cold calls doesn't always get the highest commission. The salesman that sells the most gets the highest commission, even if it is through some random connection or by sheer luck.

      Unfortunately, hard work is overrated because if it is not rewarded if it doesn't produce results. Of course that is not to say that people shouldn't work hard. The tried and tested way to produce consistently good results is through hard work. But can you put in the hard work and still fail to get results? Of course, we have all experienced such kind of failures in life before.

      I believe that upgrading skills is one of the few ways for those at the margins to move away, where both technology and cheap foreign labour is slowly engulfing those who remain there. I believe those who are not complacent and willing to put into use that same ethics of hard work to learn new skills to survive and do better will be able to do so.

      We should help our weakest members by all means, but if they refuse the help, that is where society's obligations stop.

  4. Agree whole heartedly with gp blogger. Esp gandhi quote.
    Sadly in sg we are brainwash to the concept yhat if u dun succed means u r lazy.

    Thise that work 72h a week is just suppose to earn enough to survive.
    Sounds like slavery to me.
    Guess this is how the nation treats its weakest memeber.

    1. Hi Anon,

      It is a sad situation to see that people who work so many hours a week barely manage to scrape by, but there are policies in place to force the hiring and boost the wages of low income earners, as well as train them to move into higher value jobs.

      What would you suggest to be a solution? Minimum wage? That would reduce the competitiveness of marginal industries that are already struggling to compete with other countries that have much lower labour costs than us. There is only a certain pricing premium that "quality" can command, beyond which business relations break down.


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