A Case for Minimum Wages

Industrial revolution, which took place in Europe in the 18th to 19th century, had great influence to technology, economy and social life of the world. It began with the invention of steam-powered engine and extended to the use of automated machines in the replacement of manpower in manufacturing processes. Historians have many different explanations for the phenomenal advancement. One interesting question has been why industrial revolution did not occur in China, the then world's superpower. Australian historian Mark Elvin explained China was so productive in the non-mechanical way that it did not need any introduction of automation. Its abundance of labor force and cheap wages contributed to the high productivity.

In other words, cheap labor is not necessarily a plus for the advancement of a society. Cheap labor could even be an obstacle to innovation. With the workforce in dispense, employers can comfortably stick to the labor-intensive strategy and need not to invest in machinery, logistics or staff training.

Hong Kong is positioned as a service-oriented city. But it is also well known of its service quality, or the lack of it. What can you expect from a restaurant waiter or waitress who earns $16 an hour for 12 hours straight in a day?

Recently, the issue of minimum wage is back to the limelight as labor representatives urge chief executive Donald Tsang to set a floor to wages. Labor representatives argue that such a measure would protect the interest of unskillful workers. Sir Donald, who has been accused of using the controversial issue as a token in exchange for the political support of the labor groups, gave a politician-style response, saying that he is reconsidering it "at a deep level."

It is a tough issue. The introduction of a wage floor would probably leave the lowest-end workers out of job when employers realized that their contributions fall short of the legitimate cost of hiring them. Free market advocates object to the artificial intervention for it will exacerbate unemployment.

Capitalists dismissed the measure to protect their wallets. Sir Donald and his precedents have their hesitation for decades in fears that it will raise welfare expenses when the number of jobless increases. The laissez-faire concept and the business competitiveness are sometimes cited as government's concerns as well.

i believe there is no black and white on this issue. The cost and benefit are mixed, depending on different economy, demography and welfare concerns. The United States, a leader in capitalism, have long established its minimum wages. Switzerland has no minimum wages, but its workers' welfare is world class. But i would like to add one scenario in favor of the pro-minimum-wage camp, based on the situation prevailing in Hong Kong.

An effective floor to wages in Hong Kong will discourage employers from sticking to their labor-intense strategy. The employers will need to raise their labor productivity to justify the higher wages than otherwise. The easiest way to do that is cut the headcount. But there is a limit in every business unit for headcount reduction. Beyond that point, employers will have to invent efficient ways to do business, which involve enhancement of management, logistics, automation and staff training.

For example, to justify higher wages, restaurants will provide better training to waiters and waitresses, and introduce more efficient operational mechanism. Boutique and electronics shops and other retailers will offer more pleasant welcome and quality advices.

Artisans are the lowest paid in the city. A minimum wage will encourage cleaning companies to equip the workers with more efficient tools and automated machinery, enabling them to do their jobs faster.

The point is employers will try to get the most out of their employees, not by exploiting the wages, but by raising their labor productivity. Some companies will automate their services as well.

The government-sponsored advertising campaign starring pop star Andy Lau is a successful one that raises people's awareness of service quality. But whether the workers are willing and able to follow his advice is a realistic matter.

Free market advocates who celebrate the freedom of choices would question why employers do not choose to invest in training if profitability is to follow. Game theory lends a tool to explain this myth. Given that no one invests in training and automation, you don't want to be the only one standing for it because you would end up with losses due to the extra costs involved, or otherwise cannot compete in pricing with your competitors. That's exactly the dilemma facing businesses employing unskillful workers in Hong Kong.

But if a wage floor is set, every employer needs to upgrade his services up to the level that warrant profitability. Those who stick to the old game would lose their edges, unless they take the risks of hiring in the black market. The silver line is that all will be better off by providing quality services, compared with otherwise when they compete solely in prices.

Those workers who earn wages at, or near, the minimum levels will have high incentive to do well, facing the threat of losing their jobs. They cannot retreat and find a job that bear lower expectations as long as they want to stay employed.

Grass-root focused politicians will be disappointed as the minimum wage cannot help the poor. To fight for better unemployment benefit will become their next job.

Among the losers will be the least competitive workers as well as least competitive companies. Those consumers who choose to be served manually would face higher prices, but those who choose to have automated services would enjoy lower prices. Among the winners will be competent workers, responsive companies and Hong Kong's service sector as a whole. Will Hong Kong undergo a "service revolution" of its own?

Oct 19, 2005
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