It is not just the 2008 financial crisis followed by a global recession, which now followed by a sharp slowdown in the demand from the world’s engine of growth, China, that is causing Pakistan’s exports to decline, but it is mainly that this government’s own economic policies are taking a toll on Pakistan’s ability to compete; meaning our “Competitiveness”. Shortsightedness, misplaced priorities, ill-conceived taxation drives, anti-business regulatory legislations, imprudent policy making for the sake of cheap popularity and a total disconnect with the real issues facing home-manufacturing, are all factors responsible for bringing Pakistan’s competitiveness to a level, which is the only exception amongst the South Asian economies – all other SAARC countries have registered an increase in their respective annual exports.
In another such display of poorly thought through policy measures, the Punjab government recently raised the minimum wage from July 01, 2015, to Pak Rupees 13,000/month, signaling an 8.33 percent increase in a (government’s) self-confessed period of low inflation of under 5%. And in its usual high handed style, no stakeholder was consulted nor was any rationale provided justifying the upward revision, which may have earned a few brownie points for the Punjab leadership, but in essence means that the local industry is now being asked to export this added inflation at a time when it is already struggling to compete globally! India by the way is at present working to ring major labor reforms aimed at fixing regionally competitive salary and employment regulations to instead focus on ‘job creation’.
Now no one here is saying that minimum wage should never be rationalized, but point being that direct wage determination can be a tricky thing in quite a few ways and governments needs to be careful before determining the same. First, it may not really serve the interest of the majority of low level workers, second, it may hurt basic employment generation in an economy and third, it can end up hurting the competitiveness of an economy by reducing subsidization, through cheap labor, of its potential exportable surplus, in-turn, adversely affecting the long-term transition of an economy from a low-skilled to a high-skilled human resource base. In any case, the debate on minimum wage dates back a long time and one that has swung both ways over the last three decades. Up until the mid nineties there was a near consensus among world economists that raising the minimum wage was a bad idea. The argument being that market is really good at setting prices on things, whether it is apples or labor. If you raise the price on a worker, employers will hire fewer and you will end up hurting the people you meant to help. Then in 1993 the economists David Card and Alan Krueger looked at fast food restaurants in New Jersey and Pennsylvania and found that raising the minimum wage gave people more income without hurting employment. A series of further studies in Britain buttressed these findings.
In fact even today we find the Obama government in the U.S. catering to this Card-Krueger argument, citing raising minimum wage as the central piece of its progressive economic agenda. Administrations of cities and states across the USA have raised their minimum wage level during the last two years with New York also following suit last month (after a gap of 5 years) stating that they have no evidence that raising wages will cost jobs. They opine, that on the contrary, forcing businesses to raise their minimum wage will not only help low-wage workers; it will actually boost profits, because companies will better retain workers.
Unfortunately, this claim is being questioned more and more ever since the Card-Krueger study, which happens to be the last conclusive work providing empirical evidence in favor of arbitrarily raising minimum wage levels. More recently, studies done by David Neumark of the University of California, Irvine and William Wascher of the Federal Reserve and Michael Wither and Jefferey Clemens of the University of California, San Diego, point out that poorly worked out raises in the minimum wage can result in significant job losses. Wither and Clemens looked at data from the 2007 federal minimum-wage hike and found that it reduced the national employment-to-population ratio by 0.7 percentage points (which is actually a lot), and led to a six percentage point decrease in the likelihood that a low-wage worker would have a job. Because low-wage workers get less work experience under a higher minimum-wage regime, they are less likely to transition to higher-wage jobs down the road. They found that two years later, workers’ chances of making $1500/month were reduced by five percentage points. In addition, Thomas MaCurdy of Stanford and economists Joseph Sabia and Richard Burkhauser, point out in their work that as a poverty-fighting measure the minimum wage is horribly targeted. Their 2010 study found that only 11.30 percent of workers who would benefit from raising the wage to $9.50 an hour would actually come from poor households and that single mothers’ employment dropped 6 percent for every 10 percent increase in the minimum wage.
So where does this leave us? In a way we have a very complicated situation, especially in countries where both population growth rate and poverty are high and jobs are scarce, e.g. Pakistan. Here one must remember that the key intellectual upshot remains despite what the government may want to believe; the laws of economic gravity do not get suspended. You can’t impose costs on some without trade-offs for others. You can’t intervene in the market without unintended consequences. And the real life haunting fact continues to be that while raising the minimum wage will produce winners among jobholders from all backgrounds, it will on the other hand disproportionately punish those with lowest skills. Even more damagingly, it will hamper future job creation for those who are least likely to be able to justify higher employment costs and national economic growth that hinges on the back of exports will stumble. Lest we forget, there is only one thing that will decrease poverty and increase opportunity: economic growth based on higher tangible production attained through sustained competitiveness!