National Minimum Wages: International Experience

Transcription

1 National Minimum Wages: International Experience Patrick Belser Senior Economist International Labour office (ILO)

2 Structure of the presentation Part I: A short history of minimum wage systems Part II: The level of minimum wages and employment effects

3 Some definitions ILO legal experts have defined the minimum wage as: the minimum sum payable to a worker for work performed or services rendered, within a given period ( ) which may not be reduced either by individual or collective agreement (and) which is guaranteed by law. Minimum wages refer to gross earnings before taxes, social security contributions and other statutory deductions Minimum wages can be hourly, daily or monthly. If they are daily or monthly they should be set for workers normal working time. In other words, workers should not be forced to work overtime to obtain the minimum wage.

4 A short history of minimum wages Minimum wages have developed in New Zealand and Australia at the very end of the 19 th century, and the U.K. adopted its first minimum wage legislation in These minimum wages covered relatively few categories of workers, with particularly low levels of pay: they started as a substitute for collective bargaining in low-wage industries. This industry-specific perspective is reflected in the ILO Minimum Wage-Fixing Machinery Convention No.26 (1928), designed for workers employed in trades or part of trades in which no arrangements exist for the effective regulation of wages by collective agreement or otherwise and wages are exceptionally low (Art. I). It covers manufacture and commerce, not agriculture.

5 A short history of minimum wages After the Second World War Coverage expanded and national minimum wages appeared in France (1950) and elsewhere; In the U.S., coverage of the Fair Labor Standards Act of 1938 increased from about 20% of the U.S. workforce initially to nearly 80% in The evolution towards minimum wages with national coverage is reflected in the adoption of ILO Minimum Wage Fixing Convention No.131 (in 1970), which encourages systems which covers all groups of wage earners against unduly low wages. If some groups are not covered, the Member State should explain the reasons for not covering them.

6 A short history of minimum wages While minimum wages were regarded favourably until the 1970s, the context changed after the oil shock in 1973, the debt crisis in developing countries in the 1980s and the implementation of structural adjustment policies in the 1980s and 1990s. The U.K. abolished the Wage Councils in the 1980s and denounced ILO Convention 26 in In the last 2 decades, minimum wage policies have made a comeback. Many countries have recently adopted or reactivated minimum wages. Examples include South Africa, but also Brazil, China, or the U.K. - which introduced a system of national minimum wage in 1999.

7 A short history of minimum wages By today about 90% of ILO Member States do have a minimum wage system in place. As result of history, systems vary between sectoral/occupational and national minimum wages

8 A short history of minimum wages Which system is better? Both are legitimate but: A regional study in Latin America concluded that the least effective minimum wages institutions are those that are too complex and, therefore, that it is better to design a simple system that is well understood by all, rather than trying to fully address the heterogeneous needs of the labour force (Cunningham, 2007, p.4). Complex systems can also test the limits of a country s institutional capacity: including the quality of wage statistics, and the enforcement capacity of labour administrations. When the level of aspired complexity exceeds the capacity of the country, minimum wages cease to be an effective instrument of social protection.

9 A short history of PB5 minimum wages Legal coverage is lower with sectoral minimum wages 70-80% 99%

10 Slide 9 PB5 Patrick Belser, 2010/12/13

11 PB4 A short history of minimum wages Non-compliance is sometimes higher in complex systems 70-80% 99%

12 Slide 10 PB4 Patrick Belser, 2010/12/13

13 A short history of minimum wages There is a risk that complex systems of minimum wages can become substitute for collective bargaining (eg Philippines). Minimum wages should be targeted at the lowest-paid employees. Collective bargaining zone MW zone

14 A short history of minimum wages Simple minimum wages are is easier to communicate, and awareness tends to lead to better compliance US (1956) Lee and McCann (forthcoming)

15 Part II The level of minimum wages and employment effects

16 Level and employment effects Recent experiences have changed the perception of minimum wages. Many studies now show that when minimum wages are set at a reasonable level, they have no significant employment effect one way or the other. In 2009, after 10 years of monitoring, the UK Low Pay Commission (employers and workers) had not found any significant negative effect on employment. Among policy experts, the minimum wage was named as the most successful government policy of the last 30 years.

17 Level and employment effects Why no employment effects? It raises costs to employers but also increases consumption by the low paid. Output and Investment Aggregate Demand Employment Wages and other household income Consumption

18 Level and employment effects A balanced approach is reflected in ILO Convention No. 131 which calls on policy makers to take account of: a) the needs of workers and their families, taking into account the general level of wages in the country, the cost of living, social security benefits, and the relative living standards of other social groups; and b) economic factors, including requirements of economic development, levels of productivity, and the desirability of attaining and maintaining a high level of employment.

19 Level and employment effects The needs of workers and their families can be assessed or calculated through the concept of a minimum living wage. One simplified formula and purely hypothetical example: subsistence minimum * average household size Number of household members who work full-time 200 US$ * 4 adult equivalents = 400 US$ 2

20 Level and employment effects Economic effects depend on the proportion of wage-earners affected by a certain minimum wage, and can be evaluated through indicators such minimum wages / average wages Figure 6: The Level of Minimum Wages in Developed Economies and European Union in 2010 (% of Full time median wages) percent (%) ratio of minimum wages to average wages Source: UK Low Pay Commission, 2012

21 Level and employment effects There is no magic formula: using indicators, levels should be agreed by Governments and social partners

22 Level and employment effects The Minimum Wage Fixing Convention, 1970 (No.131) calls for the provision for the direct participation in the operation of the minimum wage system of : (a) representatives of organisations of employers and workers concerned or, where no such organisations exist, representatives of employers and workers concerned, on a basis of equality; (b) persons having recognised competence for representing the general interests of the country and appointed after full consultation with representative organisations of employers and workers concerned, where such organisations exist and such consultation is in accordance with national law or practice. => importance of objective data and analysis

23 Level and employment effects Effective minimum wages need to be increased from time to time, as the cost of living evolves and labour productivity increases. In some countries this done at regular intervals in others it is done in an ad hoc, unpredictable way. In Brazil, the minimum wage is increased by the sum of inflation in the previous year plus the GDP growth of 2 years before (if >0). In France, the minimum wage is automatically increased by the amount of previous year inflation, whenever inflation is in excess of 2%, and no less than half of the average hourly wage growth of blue collar workers.

24 A note of caution Minimum wages have been used for more than a century to ensure that economic growth translates into a better life for those at the bottom of the wage distribution. But it is not a substitute for economic growth!

25 Additional considerations Minimum wage is often used as a basis for calculating social benefits, especially when there is no other socially acceptable benchmark. This can have wide budgetary implications for the State and makes minimum wage adjustment more complex Minimum wages are only one in a set of tools towards decent living standards for workers and their families. Not a magic bullet. It must be articulated with collective bargaining and social protection policies.