Monday, April 2, 2012

Minimum Wage Too Blunt and Risky an Instrument to Improve Living Standards

Aesop’s fables tell of a hen that lays a golden egg daily but is killed by a farmer imagining it to have even more treasure inside. Having done so, however, he finds the hen is just feather and flesh, no different from the rest. The traditional lesson drawn is the importance of contentment. But it is also a hard-nosed business parable: profits are denied to those who harvest too quickly.

If we extend the idea to the economy, for the most part Indonesia and the rest of Asia have managed the economic goose well. The region is attractive to investors today because low input costs — chiefly land and labor — make businesses profitable. For Indonesia this is a moment to savor because it has come after a tremendous period of deleveraging in which the total private sector credit-to-gross domestic product ratio contracted from 61 percent to 25 percent in the decade after 1997. In the same period, salaries rose slowly and governments saved more than they spent.

This discipline has been mirrored across the Association of Southeast Asian Nations even as democracies in the West and Japan have continued to add to their massive debt piles. Governments of Southeast Asia’s five largest economies (excluding Singapore) ran a miniscule budget deficit of about 1.5 percent of GDP in the years 2003-07, according to the Asian Development Bank.

But there are signs that discipline is ebbing. Governments across Asia are running larger budget deficits to pay for social protection in health care and social security. ADB data show projected 2012-16 budget deficits of 2.84 percent for the largest Asean economies (excluding Singapore), still small but nearly double what they were in the preceding half-decade.

Moreover, governments are also hiking wages, thereby increasing costs not just for themselves but also the broader economy. Just connect the dots. In the last six months, workers in some parts of Indonesia have secured minimum wage increases north of 30 percent, sometimes after threatening to disrupt access to critical public infrastructure. In Malaysia, plans for the country’s first-ever national minimum wage are being finalized in time for elections, just as occurred last year in free-market Hong Kong. In Thailand, last year’s floods did not stop the decision to hike the national minimum wage this month, which followed on the heels of Vietnam’s 2011 wage hike. By next year, only Singapore of the major Asean economies will not have a minimum wage.

Minimum wage advocates have been emboldened for two reasons. First, the wage hikes in China over the past two years have created some breathing space for Asean, which traditionally competes with China for investment in labor-intensive industries. But more important is the growing concern with inequality.

There is a sense the many have done worse than the few during the recent boom. In response, populist politicians and civil society reformers have come together to advocate a minimum wage. They see a higher national wage floor as an inevitable hallmark of civilized society (Germany, Austria, Switzerland and the Scandinavian countries don’t have one).

I share the concern with inequality. The whole point of economic growth is about letting people live better lives. Inequality undermines this by limiting access to health care, education and other social goods. Left unchecked, it eats at the legitimacy of the political system.

There is also nothing wrong with rising wages, to the extent that they are justified by rising productivity.

Rising salaries are a gift for ordinary workers to enjoy after years of slow-growing incomes. But a higher wage floor ultimately harms those we wish to protect. Basic economics suggests that an increase in wages that is not supported by a corresponding increase in productivity will lead to higher unemployment in the long run (though not necessarily in the short run, since businesses do not shut down overnight).

The correct response is not the blunt knife of a minimum wage but the fine scalpels of competitiveness and productivity. Basically, if you raise a business’s costs, you should also try to raise its revenues, which can be done by improving human and physical infrastructure, increasing access to new markets, or augmenting the level of technology used.

Instead, the debate in Indonesia has become an unhelpful stew of class warfare. This is unfortunate and unhealthy since we are all in this together.

The laws of economics will take by force what they cannot get by acquiescence. If businesses fail, workers go unemployed. In the long run, business, labor and government have no choice but to work together to increase Indonesia’s competitiveness.

Ultimately, the minimum wage debate is a smaller front in the broader battle for sustainable economic systems. The real wildcard for Asia’s economic future is the establishment of social security and health care systems that have drowned the West in mountains of debt. Will we have the discipline to do it right?

In Indonesia, a bill was passed last year creating a public body to provide health insurance to all Indonesians by 2014. Will it be well-managed or will it accumulate unfunded liabilities? Only time will tell.

In the meanwhile, the most important thing is to involve everyone in the economic process. The government should engage the business community and the latter should engage labor. Specifically for the minimum wage battle, animosity between unions and employers is not a given.

Unions can actually be a force for competitiveness, as in hyper-efficient Germany where union participation in boardrooms and sensible leadership have restrained wage inflation while also improving working conditions and hours. This (and technology) is why the average German worker does around 700 fewer hours of work annually than a Greek and why his or her household still has $6,400 more in real disposable income.

Paradoxically, the more disciplined the economy, the more freedom its workers have. That’s productivity.

Our economy is not Germany’s. But there is no reason we shouldn’t aspire in that direction. Everything is possible, one golden egg at a time.

By John Riady lecturer at Pelita Harapan University Law School and editor-at-large at BeritaSatu Media Holdings.

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