Does a lower minimum wage improve competitiveness or employer profit?

The question of how to measure ‘unit labour costs’ depends on whether you view ‘wages’ through the lens of distribution, employment performance or  some ‘objective’ measure of supply and demand in a perfectly competitive labour market. Where one sits on the debate, in reality, boils down to ones normative-political preference. You wont hear economists talking about labour costs in terms of distribution. Similarly, you are not likely to hear many Marxists talk about unit labour costs in terms of employment performance. It is a complex measure that begins from the assumption that labour is a cost to an employer. Thus, it does not begin from the assumption that wage remuneration is a benefit to employees. It includes money paid for hours worked, bonuses, social security contributions etc. Furthermore, it makes a big difference whether you measure labour costs in terms of time-hourly remuneration per employee (excluding productivity per unit of output) or unit costs as a national average (including productivity per unit of output).

Few would doubt that unit labour costs as a measure of competitiveness matter at firm level. But, to argue that national aggregate unit labour costs are a measure of national competitiveness is quite another story. As argued in this Felipe and Kumar paper “normative statements about the need to contain increases in unit labor costs to maintain competitiveness inevitably imply an increase in the share of capital”. Economists take an increase in profit as a good but an increase in labour as a share of capital as a bad. To be consistent they should be explicit about the implicit normative implications – as is expected of political scientists and sociologists.

This paragraph is worth repeating in full:

Thinking of unit labor costs through the lens of the distribution dimension should make one reflect upon the concept of competitiveness in a different way from the traditional one. This is because, in standard analyses, an economy is deemed more competitive the lower its unit labor cost is. While, as we have noted, this may make sense at the firm level, the implications at the economy-wide level are potentially very different. The reason is that the flip side of this line of reasoning is that an economy is more competitive the lower its labor share is,ceteris paribus. Hence, a great deal of policies to lower unitlabor costs are, effectively, polices to lower the share of labor in total income. However, are the economies deemed as the most competitive (i.e., the economies that grow fast and/or gain market share) those whose labor shares grow the least or even decline? The answer is that this need not be the case. Would it be sensible from a policy perspective to conclude that the lower the labor share, the better off the economy? Surely there is something wrong here“.

So, public policies that argue for getting rid of the Joint Labour Committee (JLC) system  (in Ireland) to increase ‘competitiveness’ are an argument that employers need more profit. It is a question of ‘hope’ whether employers will re-invest the surplus capital generated from decrease in labour costs to generate employment. If IBEC, ISME, Chambers Ireland and Fine Gael argue that they want to cut wages by x percent to increase y amount of jobs – this is a clear improvement in labour market performance. But, if the argument is we want to cut x percent to increase y amount of profit to improve our ‘competitiveness’ – then it is simply an argument that capital should earn more and labour less in total-aggregate terms. There is no absolutely no evidence to suggest a cut in minimum wages will lead to an increase in employment. Therefore, all arguments to cut low pay is an argument to increase the profit margin of employers.

Adjusting on unit labour costs rather than unit capital costs has implications as to who should shoulder the burden of the crisis – capital or labour. This is not to deny it might be necessary for labour to shoulder some of the burden, given that we live in market economy. But, it does have huge normative implications and indicates a clear preference by the state to defend the interest of employers over employees when confronting the economic crisis. Furthermore, it will inevitably lead to less money in circulation in the economy. Less money circulating in the economy means fewer jobs. Cuts in low wages to improve competitiveness is, in reality, an argument to increase profit. Chambers Ireland, in particular, if you listen closely to their arguments are, in effect, lying about the relationship between competitiveness, employment and minimum wages.

For example, Microsoft increased their profits in Ireland by 44 percent last year and productivity by a similar huge margin. This is celebrated. There would be holy war in the media if it was announced that nominal wages increased in any sector by 44 percent. It seems to me that what is more important from a social science perspective is to make explicit the implicit normative implications of all these arguments. So, every time you hear employers, politicians, orthodox economists or the media talking about the need to reduce unit labour costs, ask yourself – who really benefit from this?

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