Friday, December 16, 2005

Down with the minimum wage

In one seminar yesterday, a participant called for higher minimum wage for labors. He asked why is it so difficult for the government to raise the minimum wage? The question was not addressed to me directly. But I would have responded like this:

My mother hire two maids. In Jakarta, it's normal to pay 700 to 800 thousand rupiahs to a maid each month. Say it's 800,000. Now imagine that the government require households to comply with the minimum wage law. For Jakarta, it's Rp 1 million. What would my mother do? Well, she might give up one maid, and hire only one. Or, if she ever thought to hire a third one, she would cancell that. In the first case, my mother would send one person to unemployment. In the second case, my mother could have created one employment, but thanks to the minimum wage law, she called it a no.
What's the moral here? Minimum wage law is good only for those already in the job and who are lucky not to get kicked out by the saving employer. Minimum wage law is bad for unemployment.

You might ask: but minimum wage law is not required for households. What difference is there between companies and my mother?


  1. I agree that its hard to increase labor wage while we have this much labor surplus. I am in favor for a solution that would systematically reduce this surplus. That is, we should no longer stimulate low cost labor as the work horse of our economy; I consider this as NOT the way to improve the living standard of the poors. Instead better education should be encouraged. And along this line, you can also see increasing minimum wage as part of the policy to discourage unskilled labor.

  2. Encouraging better education is one thing. Discouraging unskilled labor is another. I'm all for the former, I'm careful to the latter. Good wage payment schedule should accomodate all the layers of productivity in the industrial relation. It should be noted, however, that unskilled labor are as needed as the skilled labor, only for different level of complexity and therefore different compensation. Everybody can get and should get better education. But not everybody can excel. And you can't punish the unlucky by keeping them away from job market, by enforcing a minimum wage regulation.