Dilemma of the minimum wage: paying labor for more than it’s worth

A principal effect of the minimum wage is to “injure some of the lowest-paid workers by forcing them into even lower-paid occupations exempt from the act, one of which is unemployment”… the effect of the minimum wage is not to cause an employer to raise wages… rather, it is to cause him to eliminate all labor that now costs more than it is worth in his productive process… work is done in ways that economize on low-productivity but high-cost labor; labor-saving methods are tried, machines are substituted for labor, and a somewhat higher quality of labor is hired at the somewhat higher wage set by law, leaving the least productive with fewer and worse opportunities than before. – Edward C. Banfield, The Problem of Unemployment, The Unheavenly City.

I’ve recently concluded a study on youth employment and from this a perfect case illustrates the point made by Banfield. In one of the study sites, college/university undergraduates and graduates compete with high school graduates for jobs such as clerks and other low-quality labor. (The college undergraduates and graduates cited lack of confidence as their main reason in not seeking jobs within their skills level.) Employers hire the college undergraduates and graduates 99.9% of the time.

If I’m the employer, I’d do the same. Why? Market pressures. I’d prefer college graduates even for jobs that can be done by high school graduates because I want to maximize the value of what I pay for labor. Compared to the high school graduate, the college graduate is worth the PHP 446 (current minimum wage in Manila). By hiring the college graduate, for the same amount of wage, I have in my production force a more reliable, more productive labor.

Going back to the study site. The situation, in effect, was and continues to be detrimental to the employment prospects of the locale’s high school graduates. So-called jobless growth had nothing to do with it. The minimum wage does.

I think it was the Joint Foreign Chambers of Commerce in its Arangkada report who mentioned that the minimum wage in the context of the Philippines does not reflect labor productivity but rather lifestyle. In essence, employers pay minimum wage workers (in Manila) the PHP 446 regardless of whether the worker is productive or not. The rational highly-productive worker on the other hand is pushed to think whether or not it is worth the effort to be more productive than the least productive worker who is paid the same wage as he or she is.


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