Can Minimum Wage Reduce Poverty?

A guide to its effective implementation…

The minimum wage in the United Kingdom is considered one of the most successful government policies ever implemented. It was intricately planned and structured over a significant length of time. And with one of the lowest unemployment rates in Europe, Britain, at first sight, appears to illustrate an accurate balance between executing a minimum wage policy and preserving the uniform availability of job opportunities (even if Brexit could change that drastically). Apart from Britain, even Hong Kong has witnessed an upward trend in median monthly wages of unskilled workers by 43% in money terms and 20% in real terms between 2010 and 2014. Synchronously, the 2014 Report on Annual Earnings and Hours Survey published by The Census and Statistics Department outlines inputs from the Minimum Wage Commission that indicate a fall in the unemployment rate for elementary occupations from 4.4% in 2010 to 3.3% in 2014. Advocates of minimum wage legislation argue that it can alter the income distribution in favour of the low-paid labour force by attenuating the bottom tail of the distribution model. Opponents criticise its “Disemployment Effect” and emphasise that it might shrink the share of earnings going to the impoverished and destitute workforce.

A higher minimum wage, evidently, increases costs for firms. This may curtail them from hiring the exceptionally low-wage, low-skill workers. David Neumark, an American labour economist, terms this the “Disemployment Effect”. It is characterised by the loss of jobs, reduction in working hours, automation, or the struggle to enter into new jobs. The Disemployment Effect, if necessitated by a minimum wage, invalidates the purpose of bringing in such a policy in the first place. But this effect can be overcome. Firms can be offered economic incentives such as subsidies and grants, to compensate for their increased costs. Lower taxes and excise duties could also serve as economic incentives, ensuring more cash is available for businesses to absorb the costs of paying a higher minimum wage.

However, the Disemployment Effect is not the only uncertain outcome of a minimum wage policy, especially in developing countries. As the minimum wage and poverty lines are closer to each other in developing nations, an increase in minimum wage could lift workers out of destitution. Yet, several minimum wage workers in developing countries are young, work part-time, and belong to high-income households. Correspondingly, most households in poverty seldom have anyone in the workforce. Hence, more often than not, a minimum wage ends up helping the privileged and ignoring the needy.

To end poverty, a minimum wage should be determined for households and not individuals. This will facilitate the redistribution of income to poor families over low-earners of rich families. Simultaneously, governments must increase spending on education and skill development to build an economy with a speedily employable workforce, hence fostering growth and development. A minimum wage policy also needs to tackle the problem of incomplete and irregular legal coverage. Although minimum wages seem to be extensively applicable, in several cases the coverage is ineffective and disregards those most in need of social security, such as domestic workers or homeworkers. By neglecting a few crucial sectors of the economy, we fail to fully utilise the potential of minimum wage legislation. Even though legal coverage of the minimum wage developed from the mid-2000’s to the late 2000’s in India and South Africa, it covered only about 70% of low-paid workers by late 2000’s; in Peru, domestic workers were barred from the statutory minimum wage. Research suggests that weak legal coverage may at times ignore around one-third of all wage earners.

We may confront this perplexity by undertaking comprehensive legislation that gratifies all sectors of an economy, and by ensuring that such legislation is strictly enforced. This, while a herculean task, can be accomplished by the extensive and intensive consultation of all stakeholders and a thorough analysis of a variety of socioeconomic and employment data.

The minimum wage is fast becoming a universally adopted policy today and the principal question is how to operate the system in order to maximise its benefits. A conscientiously devised minimum wage policy can relegate low pay, inequalities, and poverty, at little or no adverse cost to employment. Yet, the minimum wage either continues to be low in many countries, or applies solely to certain select sectors. But with a little more fine-tuning, as I have suggested, I believe it is possible to shape an effective minimum wage policy that successfully reduces poverty and income inequalities across countries without hurting the job market.


Shivang Singh

An ambitious, perseverant, and all-rounded parliamentarian in the making...

The Pangean does not condemn or condone any of the views of its contributors. It only gives them the space to think and write without hindrance.