The Tribune

Considering the Government’s stated intention to increase the minimum wage from its present $210 to $250 per week, as per its general election manifesto, this article will explore what such a raise would mean for the economy, workers and employers. A minimum wage is the lowest wage that employers can pay workers by law. The topic has often been controversial, and has created something a divide between politicians and economists.

Impact of increasing minimum wage

The minimum wage’s purpose has always been to help stabilise society and protect workers in the labour force. The minimum wage was designed to create a minimum standard of living to protect the health and well-being of employees. It can also help to drive activity in the domestic economy and create new start-up opportunities. For instance, an increase in minimum wage can help families improve the quality of life for their household members - something as simple as keeping the Internet on for online learning, or providing better school lunches on a consistent basis. However, some economists argue that a minimum wage does not achieve a more stable society. The reason behind this thinking is linked to demand and supply. If the price for a good or service goes up, the demand begins to decrease. In the case of the minimum wage, if the cost of labour increases, then the demand for workers by employers begins to decrease, or so the theory goes. The reduced desire among employers to hire workers leads to unemployment. In a real world context, businesses want to remain profitable and sustainable. Therefore, an increase in the minimum wage might lead to a sharp increase in wages/salaries that some businesses are not willing to absorb. In response, companies can increase the selling price of their goods and services. But an increase in the minimum wage is not the only reason why businesses increase prices. Other factors include production cost increases, additional taxes and other macroeconomic conditions.

Purpose of the minimum wage

Supporters of the minimum wage, and workers in general, have always argued that increasing salaries would help manage the rising cost of living. The cost of living is an index that is calculated by comparing the prices presently paid for a range of goods and services, on which consumers spend their money, with those paid in the past. However, the cost of living and the minimum wage do not change simultaneously. In fact, since the early 1990s, the minimum wage has only increased three times in the US. That is because increases in the minimum wage are not always linked to productivity or the inflation rate. So, will increasing the minimum wage help to offset the rising cost of living in a real world context?

Some studies have found that increases in the minimum wage result in workers having to work more jobs, or more hours, to achieve a 40-week work schedule since businesses reduce the number of hours an employee can work, ensuring that just the minimum wage is met. This occurs because, when the minimum wage increases, lay-offs may also happen because companies cannot afford to pay the higher wage bill. Employers will also consider hiring less because they cannot afford to pay the extra staff. There is also the possibility that prices for a particular service/good may increase to shore up salary costs. So, even though increasing the minimum wage will give those workers affected more money to spend, companies may also raise their prices to offset increased employee costs. However, raising the minimum wage could also boost the economy through extra spending by workers at this income level.

Impact on Bahamian businesses

A University of The Bahamas study asserted that a $350 to $500 weekly wage, or so-called livable wage, is better-suited to giving Bahamian families a decent standard of living than simply increasing the minimum wage by $40 per week - especially in today’s inflationary environment. The recent increase in inflation is driven by supply chain disruptions and pent-up consumer demand for goods following the reopening of the economy after COVID-19.

To understand how Bahamian businesses will respond to a minimum wage rise, we should consider the following:

1. We should first know how many businesses are already paying their staff above the minimum wage. If businesses are forced to pay higher minimum wages, this might discourage them from hiring new workers because of the extra costs.

2. There may be economic opportunities for new market entrants, such as college graduates, who want to have experience. Businesses could just shift or consolidate resources to ensure that higher paid workers cover business needs instead of hiring new workers.

3. The quality of services and goods may decline because productivity does not show continuous improvement. If workers are already making more than the minimum wage, they will be confident and secure in their jobs, especially in hard economic times. On the other hand, businesses may have to spend more on training and wages for new employees coming in as a minimum wage worker.

Productivity and Minimum Wage

At an enterprise level, increasing the minimum wage may make workers more motivated and incentivised to work. This new motivation could translate into increased productivity. However, it may also make minimum wage earners comfortable to the extent that no new skillsets are applied to the business. Increasing the minimum wage, and not reducing the cost of living, may only encourage low-skilled workers to become comfortable with earning more while doing less. This also makes it more difficult for employers, since the asking price for skilled workers can also increase.

Conclusion

In closing, an increase in minimum wage should be a standalone move in hopes of achieving economic growth or stability. It is only a patch on the bigger issues we face as a country. There is still a lot we need to do to diversify the economy, which largely requires making our workforce more competitive. It will not hurt to have more money in our pockets but, as the cost of living continues to increase, giving handouts is not a real and feasible solution. We need to focus on how to reduce the cost of living by using the resources we currently have and building on them. Until then, $250 is better than zero.