Jobs are part of life. Maybe you’ve heard of the concept. It’s called work and we all do it. Selling or buying time on the market. The labor market works most efficiently when wages are determined by supply and demand rather than by any other factor such as government intervention. This is the case with the minimum wage. Imagine that you visit a grocery store to buy a kilogram of apples worth €1. What will happen when you go to the fruit and vegetables stand and see that the price has been set at €2 by government order? You will probably just put the apples away and leave the store without buying them. Or you’ll buy half as many as you initially planned. Perhaps you will buy pears instead? Just as the government should not set a minimum price for apples, it should not impose on employers the lowest salary they should pay their employees. And if this happens, its consequences must be taken into account.
Of course, raising the minimum wage fits perfectly into the arguments of people who are guided by feelings to help the poorest. When this is supported by the argumentation of economists that an increase in the minimum wage forces higher productivity, it leads to the impression that this may be the right way to follow.
CONSEQUENCES OF RISING WAGES
The minimum wage is the foundation on which wage relations throughout the entire economy are built. There are budgetary consequences of raising the minimum wage, as many social benefits are linked to the minimum wage. It is also a reference point for the wage structure of all employees working in enterprises. Its large increase results in the fact that wages rise too excessively and the competitiveness of companies decreases. It looks like a multi-story skyscraper. When the regulations dictate to raise the “floor” higher, the distance to other floors will decrease. Employees who have earned “above the floor” so far will feel financially degraded. Some employees will start demanding pay raises to restore shaky relations. So, there will be pressure to raise wages for everyone, to restore the proportions of this multi-story skyscraper. If this is the case in all companies, a certain sequence of events will follow, i.e. higher wages will increase costs. Companies will try to pass on some of the higher employment costs to consumers and this will translate into higher prices. This will result in a decline in demand and, as a result, in sales. This will require adjusting the scale of production and dismissing some workers – the least efficient ones. All these factors combined will undoubtedly lead to a price increase next year and probably, unfortunately, to a slightly delayed, but still, a wave of massive company closures.
From the employee’s point of view, the increase in the minimum wage, which is intended to force higher productivity, will end up pushing the weakest and most needy out of the full-time labor market. Such people may switch to civil law contracts – contracts of mandate and contracts of specific work – or enter the grey market. The reality is that the artificial forcing of higher wages cannot make employers pay more than their employees are worth. A higher minimum wage prompts a greater percentage of entrepreneurs to circumvent it. The alternatives are – apart from the aforementioned dismissal of some people and shifting certain working duties to the remaining employees (a secret of increasing work efficiency) – shortening the working time and automation of work. In the latter case, enterprises can replace low-skilled labor with machines. Similar to the example above, we can choose pears instead of apples when shopping in a store. So, for example, grocery stores can take another step toward investing in self-checkout systems, work automation systems, or finally apps that will replace human workers. Research conducted in 2016 by scientists Daniel Aaronson, Eric French, Isaac Sorkin, and Ted To shows that once the minimum wage is raised, the market reacts with the mechanization of work because activities performed by low-skilled workers are relatively easy to replace by machines.
RIGHT MOVE?
The second wave of Covid-19, another lockdown, and a wave of inflation hinder the operation of enterprises. Unemployment is growing everywhere in the world, including in Poland. Is a sharp increase in the minimum wage the right move? As it turns out, it is also more difficult to “get” or “find” a job. This will particularly decrease young people’s chances of getting their first job. Research shows that in Poland in the period 2002- 2013, about 116,000 jobs were lost annually due to the increase in the minimum wage, of which as many as 39 percent were people under 29 years of age. Hence, an increase in the minimum wage leads to a decline in the incomes of the poorest, both those who are looking for a job and those who are dismissed, causing increased poverty, which is exactly the opposite of the intention to raise the minimum wage. The real tragedy of minimum wage regulations is that they are supported by well-intentioned groups, whose aim is to reduce poverty. Meanwhile, people who suffer the most from increases in minimum wages are usually those who are most affected by poverty.
Economists have the least influence on the policies in the areas they know best and agree about. They have the greatest influence on the policies they know the least and generally disagree about, depending on perspectives. The minimum wage belongs to the former, but it creates so much unnecessary buzz because it flows from how society perceives the phenomenon of the free market. Meanwhile, in economic theory there exists quite a serious agreement regarding perceiving the minimum wage. Keynesians, monetarists and not to mention the supporters of supply-side economics, have no doubts a minimum wage does harm. Interestingly, some people see this topic differently and believe that increasing the minimum wage brings relief to the poorest. And as long as there are arguments that its growth brings positive results, economic science will remain a field for ideological debates.
