Thursday, January 11, 2018
Earlier this week I participated in a conference on minimum wage laws in Viet Nam (and SE Asia generally) at the Tôn Đức Thắng University Labor College in Ho Chi Minh City (Saigon), Viet Nam. International wage & hour law is not my specialty, so it was a pleasure to learn from the many law faculty, workers' advocates, employer representatives, and even even the former head of the VGCL (the government-controlled unified trade union) attending. My key take-aways:
The traditional neoclassical economic argument that increasing the minimum wage decreases employment may have even less salience in developing countries than in developed ones. Even in the countries like Viet Nam that produce a large quantity of the clothing, electronics, and other goods consumed in the West, the vast majority of workers still work in services and manufacturing for the local economy. Raising minimum wages can increase both worker productivity and domestic consumption, which can have a positive effect on economic growth and employment and thus offset potential negative effects.
The risk of capital flight in response to raising the minimum wage is overstated. A MNC that has built a factory here is unlikely to relocate it because of a requirement that it spend an extra few cents per hour on wages. It's less clear how increases in minimum wage laws might influence future capital allocation decisions.
- Companies looking to maximize profits by minimizing labor costs are barking up the wrong tree -- they should instead be looking to cut supply-chain costs. The pair of Nikes we spend $150 for in the West costs about $12 to make, of which $2-3 is labor costs. The $138 difference between retail price and cost-of-production is where companies should be looking if they want to squeeze further profits. Nike could slash those costs by vertically integrating, which would have the salutary effect of making Nike directly and obviously responsible for the workers who make the company's shoes. The fact that the Nikes of the world aren't doing this is telling.
- The proportion of workers in the informal economy has a huge impact on the efficacy of minimum wage laws. Minimum wage laws may actually exacerbate wage inequality in countries where a large proportion of workers are off-the-books.
- Minimum wage laws can perform an important signaling effect in developing countries. I'll add a guest post on this topic shortly.