The "Signaling" Effect of Raising Minimum Wage Laws

I posted yesterday on the conference earlier this week on minimum wage laws in developing countries. Daniel Helman (Ton Duc Thang University, Labor Relations & Trade Unions) circulated a follow-up email making a point about minimum wage laws I hadn't considered before. I suspect his argument has equal force when a single state or municipality in the U.S. raises its minimum wage significantly above (extraordinarily low, by any historical standard) national base rate. Here is Daniel's argument:

During my recent visits to Australia and Singapore (in December) I spent some time networking with academic colleagues. In both places people were talking about how Vietnam was projected to be the most important economy in SE Asia in twenty years. One of the key indicators of this projection is the rate of rise of wages here in Vietnam. The rapid wage increase is seen as a reflection of economic strength and an indicator of future economic growth.

Thus the trend in wage increases signals to the rest of the world that the economy of Vietnam is becoming increasingly robust. Such a signal leads to foreign investment at a consumer level—as international companies aim to establish an economic presence here in Vietnam. They do this now so that in the future, as the domestic demand is large, they will have a well-established presence and will be able to command a large share of the market in their sector.

***

Of course Vietnam has other features that influence its future success, such as a single-party system which allows for more focused and beneficial policies to be implemented more easily than in other systems; and a culture that is perhaps more focused on its own success after so much hardship for so many decades; and other intangibles, such as respect for the role of work and effort in the family. But the increase in wages—based in large part on the increases in the minimum wage over the past several years, has done a great deal to place Vietnam very high in its economic forecast. Such a signal leads to future investment, and these facts can form a strategy to (rightly) promote future increases in the minimum wage here so that it will reach the level of a living wage sufficient to meet more basic needs. It is similar to the point [ILO Vietnam Country Director] Dr. Chang-Hee Lee made on the first day [of the conference], about how increases in the minimum wage increase demand.

Obviously the totality of pathways and feedbacks are more complicated than what I have written above, but the essential point is that the rate of increase in wages is a signal of the growing robustness of the domestic market; and that this signal is read by global economic stakeholders and influences their behavior.

rb