Benchmarking the minimum wage to subsistence, protecting low-wage earners' livelihood - HKDF's response to the 2012 statutory minimum wage review exercise (Submission to Public Consultation on the Statutory Minimum Wage Rate)

1. Our proposal

• We propose benchmarking the statutory minimum wage to the subsistence needs of low-wage earners so that their livelihood can be better protected. In principle, the minimum wage should at least be a subsistence wage.
• We take the view that people in employment have a legitimate moral claim to a wage no less than the level of subsistence, and that the minimum wage is a policy tool to uphold this moral claim.
• We notice that the subsistence of low-wage earners is omitted in the Minimum Wage Commission's "basket of indicators" for determining the minimum wage rate.
• We also notice that the community, or at least the government, tend to conceive of the minimum wage only as a means to forestall excessively low wages rather than as a means to ensure that workers earn their living.
• We consider this conception mistaken and urge the Commission to adopt subsistence as the major criterion for determining the minimum wage.
• In our view, the main task of the minimum wage review process should be to determine the level of a subsistence wage and to forge societal consensus on it rather than to, as suggested by the Commission, strike a balance among a higher minimum wage level, employment, business survival, inflation, and Hong Kong's competitiveness.
• To us, such an idea of balancing is misconceived.
• In addition, to ensure that the subsistence needs of low-wage earners are met, the minimum wage should be automatically indexed to inflation and reviewed annually.
• We substantiate our proposal in the paragraphs below.

2. Low-wage earners' legitimate moral claim to a wage no less than the level of subsistence

2.1 We argue that the minimum wage should at least be a subsistence wage for the following reasons:

• We take as an axiom that human beings have the right to life and to this end, the right to appropriate earthly resources for maintaining reasonably decent livelihoods and at the very least, subsistence.
• Every human's right to appropriate resources for self-maintenance should be exercised consistently in a way that no individual's same right will be violated. Every human, when exercising the right to appropriate resources for self-maintenance, has the obligation not to violate the same right of others.
• Social institutions should be organized in such a way that no individual's right to appropriate resources for self-maintenance will be denied. Social institutions and social structures denying such a right should be rectified.
• In the modern private property economy, however, earthly resources have been so appropriated that
• few resources are left for appropriation for life-maintenance
• many people, wage-earners, have few alternative channels for gaining access to self-maintenance resources except through paid-employment
• it is employers and capitalists who, through offering paid-employment, control and appropriate the access to self-maintenance resources.
• If some wage earners' wages are less than subsistence, then
• the institution of modern economy denies these wage earners' right to appropriate resources for self-maintenance
• this institution at the same time allows employers and capitalists to exercise their right to resource appropriation in a way that renders the wage earners' exercise of their right to self-maintenance impossible.
• In this case, wage earners have a legitimate moral claim for the said institutional fault to be rectified, and for the obligation of employers and capitalists to respect their right to self-maintenance to be discharged.¹
• We take the view that benchmarking the minimum wage to subsistence is a policy tool to rectify the institutional fault of modern economy, to uphold wage earners' moral claim to self-maintenance, and to enforce the obligation of employers and capitalists to wage earners in this connection.

2.2 Our support for the right to a subsistence minimum wage is enshrined in international human rights charters.

• International Covenant on Economic, Social and Cultural Rights (CESCR)
• Article 7 of the Covenant provides:
  "The States Parties to the present Covenant recognize the right of everyone to the enjoyment of just and favourable conditions of work which ensure, in particular:
  (a) Remuneration which provides all workers, as a minimum, with:
  (ii) A decent living for themselves and their families in accordance with the provisions of the present Covenant … ."
• The Office of the United Nations High Commissioner for Human Rights advises that, in accordance with Article 7 of CESCR, a minimum wage enough for decent living conditions for the workers and their families should be stipulated in legislation and implemented in practice.²
• Regarding the meaning of "a decent living" or "decent living conditions", it can be inferred from Article 25 of the Universal Declaration of Human Rights, which provides:
  "Everyone has the right to a standard of living adequate for the health and wellbeing of himself and his family, including food, clothing, housing and medical care and necessary social services, … ."
• European Social Charter of the Council of Europe
• Part I, 4 of the Charter provides:
  "All workers have the right to a fair remuneration sufficient for a decent standard of living for themselves and their families."

2.3 It is noteworthy that in their proposals for combating poverty and social exclusion in the European Union published in 2010, Caritas Europa, the Church and Society Commission of the Conference of European Churches, the Secretariat of the Commission of the Bishops' Conferences in the European Community, and Eurodiaconia criticize that the phenomenon of "working poor" is a violation of low-wage earners' right to a wage sufficient for living.³

3. Balancing is a mistaken conception

• We understand that advocating low-wage earners' right to a subsistence wage may generate concerns about a minimum wage at so high a level of subsistence that it causes business bankruptcies, inflation and job losses as well as jeopardizes Hong Kong's competitiveness.
• Some may argue that a high-level subsistence wage will be unfair because business survival, consumer price concerns, the employment needs of those laid off as a result of a high minimum wage and Hong Kong's competitiveness all deserve equal and due consideration.
• In this line of thinking, fairness lies in striking a good balance among business survival, inflation, employment, competitiveness, and a higher minimum wage.
• We have to point out however that the underlying thinking informing this balancing view, namely, that setting a minimum wage inevitably involves a choice between a low minimum wage rate on the one hand, and more bankruptcies, inflation, unemployment and a less competitive economy on the other is misconceived.
• Our arguments are three-fold:
• (1) a higher minimum wage does not necessarily cause unemployment
• (2) even if a higher minimum wage does cause unemployment, the real choice is between providing subsidies to low-wage businesses and their consumers on the one hand, and providing assistance to the unemployed on the other; between the two choices, fairness mandates the latter rather than the former
• (3) competitiveness and a higher minimum wage are complementary rather than conflicting

3.1 A higher minimum wage does not necessarily cause unemployment

• That a minimum wage will cause unemployment is based on the perfectly competitive labour market model.
• However, modeling the labour market as a perfectly competitive market is inappropriate.
• The labour market is more often than not dominated by employers (or buyers) and is characterized by unequal bargaining power - employers have more market power or bargaining power over employees in setting wages and workers are often more desperate for work than employers are desperate for workers. This is particularly true in low-pay sectors.
• The latest economic theories point out that when markets are buyer-dominated, oligopsonistic or monopsonistic competition rather than perfect competition is a more accurate model for understanding the markets.
• Because of the unequal bargaining power between employers and employees, the wage level tends to be lower than it would otherwise be in perfectly competitive labour markets.
• This means that there is actually a possibility for raising wages above the market wage without necessarily putting workers out of work.
• According to the model of an oligopsonistic labour market, there may be a range of minimum wages above the market wage that have only miniscule adverse impact on employment, if any.
• Under certain circumstances, the impact may be even positive - in other words, minimum wages may cause more employment.⁴
• The minimum wage experience of Hong Kong so far is prima facie evidence that labour markets are buyer-dominated.
• The implementation of a minimum wage not only did not cause more unemployment, it in fact generated more employment in the low-pay sectors as revealed by Minimum Wage Commission data.
• Between the second quarter of 2010 and May/June 2011, the number of employees in these sectors increased by 1.7%.
• Whether a subsistence-level wage is within the "no-job-loss" range of wages has to be determined primarily through empirical studies using the right labour market model.
• Moreover, the negative impact of a minimum wage on employment, if any, may also be mitigated by consumption-led growth.
• A minimum wage in effect redistributes incomes from profits to wages.
• Increasing the level of a minimum wage will induce a decline in the level of consumption out of profits and an increase in the level of consumption out of wage incomes.
• Since the rate of spending out of wages is higher than spending out of profits, increasing the minimum wage level will induce an increase in the marginal propensity to consume in society as a whole.
• Higher levels of consumption and the capacity utilization of firms will in turn induce higher levels of investment.
• If the economy is operating at less than full employment, increasing the level of a minimum wage will, all things being equal, lead to an increase in effective demand, thereby contributing to an increase in the overall level of employment.⁵

3.2 The real choice

• Even in the case of a higher minimum wage causing unemployment, we argue that
• the choice is not between more "bankruptcies-inflation-unemployment" and a lower minimum wage
• rather, the real choice is between providing subsidies to low-pay businesses and their consumers, and providing assistance to the unemployed
• between these two choices, fairness mandates the latter rather than the former
• If low-wage earners' wages are insufficient for subsistence, unless they die immediately, someone will have to top-up their subsistence costs.
• The costs may be borne by the families and friends of low-wage earners.
• This may in turn mean that the costs are indirectly borne by businesses that pay higher than a subsistence wage. Through paying higher than a subsistence wage, such businesses indirectly bear part of the subsistence needs of low-wage earners.
• The costs may be borne by taxpayers if in-work welfare benefits exist.
• The costs may also be partly borne by charities.
• At the extreme, the costs are borne by low-wage earners themselves through ill-health and physical deterioration due to insufficient food and rest.
• In effect, therefore, when low-pay businesses do not pay subsistence wages, they are actually receiving subsidies from society for their earnings while their consumers, subsidies for their consumption.
• In the final analysis, thus, a policy that protects the earnings of low-wage businesses, contains inflation and prevents unemployment through suppressing wages amounts to a policy of providing subsidies to low-wages businesses and their consumers.
• Following this line of reasoning, when deliberating the minimum wage rate, the real policy choice is in fact between
• (1) keeping the wage level low and providing subsidies to low-wage businesses and their consumers, and
• (2) setting a higher wage level at the risk of higher unemployment and the possible consequence of providing assistance to the unemployed.
• We have to point out that subsidizing low-wage businesses and their consumers is unfair. It is unfair in several ways:
• It is unfair to low-wage earners and their families because they, albeit less well-off, are forced to provide the subsidies.
• It is unfair to legitimate claimants of welfare benefits and charity as the survival needs of low-wage businesses and the consumption needs of their consumers are no more deserving than the needs of other claimants, especially the more needy, including the unemployed.
• It is unfair to businesses paying higher than subsistence wages because they are forced to subsidize their competitors who, as a result, enjoy competitive advantage over them.
• It is also unfair to society at large as low-wage businesses operate at the expense of the long-term productivity of the labour force through robbing workers of their long-term health.
• If a higher minimum wage makes some employers jobless due to the closure of their business, to protect their livelihood, fairness only dictates that they be treated in the same way as other unemployed and be provided with unemployment benefits.
• Employers should not enjoy the privilege over other wage-earners of an alternative means of protecting their livelihood, namely, a subsidy for their businesses.

3.3 Competitiveness and a higher minimum wage are complementary

• Regarding the relationships between competitiveness and a higher minimum wage, we side with the views of Britain's Low Pay Commission and the Fabians.
• Britain's Low Pay Commission agrees that the minimum wage must support a competitive economy.
• Nonetheless, it takes the minimum wage and economic competitiveness to be complementary rather than conflicting.
• It considers economic competitiveness and growth to be dependent on a range of factors other than costs of labor.
• Competitiveness could be achieved through innovation, good management, well-targeted capital investment and the development of work skills.
• If firms compete solely on the basis of low pay, this "can lead to a damaging downward spiral of low wages and poor standards, which is detrimental to both businesses and workers."
• Firms pursuing a high productivity strategy would also be unfairly undermined by competitors relying on low-wage employment.
• To the Commission, the minimum wage in addition to being a labor policy is also an economic policy serving the following functions:
• protecting reputable firms from being undercut by competitors solely on the basis of depressed wages.
• having the potential to encourage competitiveness based on a better-skilled workforce and better quality products and services, which are key factors in a modern, dynamic economy.⁶
• The Fabians lobbied for the introduction of a minimum wage in 1906 in Britain.
• They pointed out that businesses paying less than a subsistence wage were "parasitic" on society and would have serious repercussions for the economy and society as a whole.
• Knowing that their costs of production will be subsidized by society at large or by the state in one way or the other, parasitic employers have an incentive to depress wages further.
• For the same reason, parasitic employers have little incentive to improve the productivity of their operations and workers through training, better management or technological advancement.
• The macro-socioeconomic results of parasitic trades are therefore manifold:
• low-wage-low-productivity trades will expand at the expense of more productive "self-supporting" trades
• the equilibrium number of low-wage jobs in the economy will be higher than it would otherwise be in the absence of subsidies
• society's capital, brains and manual labour, in the aggregate, will be less productive than they would otherwise be
• For the Fabians, a minimum wage set at the level of subsistence is one policy tool to improve the productivity of low-wage businesses as well as the overall productivity of the economy.
• Admittedly, some less productive low-wage businesses will unavoidably be forced out of business as a result. But this should be welcomed on the ground of macro-economic efficiency rather than deplored, as this will allow capital and labour to be redistributed to more productive uses.⁷

George Cautherley
Vice Chairman
Hong Kong Democratic Foundation
21 May 2012

¹ The discussion above is partly based on John A. Ryan. 1906. A Living Wage: Its Ethical and Economic Aspects. New York: The MacMillan Company.
² Manfred Nowak. 2005. Human Rights: A Handbook for Parliamentarians. Geneva: Inter-Parliamentary Union and Office of the United Nations High Commissioner for Human Rights, p. 134.

³ Caritas Europa, the Church and Society Commission of the Conference of European Churches, the Secretariat of the Commission of the Bishops' Conferences in the European Community, and Eurodiaconia. 2010. Do Not Deny Justice to Your Poor People: Proposals for Combating Poverty and Social Exclusion in the European Union in the Framework of the Lisbon Treaty, p. 30.
⁴ For oligopsonistic and monopsonistic competition models, see V. Bhaskar, Alan Manning and Ted To. 2002. Oligopsony and monopsonistic competition in labor markets. Journal of Economic Perspectives 16(2): 155-174; V. Bhaskar and Ted To. 1999. Minimum wages for Ronald McDonald monopsonies: a theory of monopsonistic competition. The Economic Journal 109(April): 190-203; William M. Boal and Michael R. Ransom. 1997. Monopsony in the labor market. Journal of Economic Literature 35(1): 86-112; Alan Manning. 2003. Monopsony in Motion: Imperfect Competition in Labor Markets. Princeton, NJ: Princeton University Press.

⁵ The analysis in this sub-section is directly quoted or paraphrased from Robert E. Prascha and Falguni A. Shetha. 1999. The economics and ethics of minimum wage legislation. Review of Social Economy 57(4): pp. 467-468.
⁶ Low Pay Commision. 1999. The National Minimum Wage: The First Report of the Low Pay Commission. Norwich: The Stationery Office, p. 17.
⁷ For Fabian views on the minimum wage, see W.S. Sanders. 1906. The Case for a Legal Minimum Wage. Fabian Tract 128, July: Sidney Webb. 1912. The Economic Theory of a Legal Minimum Wage. The Journal of Political Economy 20(10): 973-998; Sidney Webb and Beatrice Webb. 1920. Industrial Democracy. London: Longmans, Green and Co.

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