Minimum wage reducing poverty in developing countries?

The Financial Times had a guest post from a professor at Brazil’s Fundação Dom Cabral which is one of the top business schools in the country. The premise of the post was that increases in minimum wage have been the driver of poverty reduction in both Brazil and China. The author notes that the minimum wage has increased in China on average 8% per year from 2000 until 2014. Through the law of compounding interest, this amounts to an almost 300% increase since 2000.

Post from the Financial Times:

Now a couple things came to mind when reading that. First, if the minimum wage tripled in only 14 years, it must have started at a very low level. In other words, the minimum wage was largely irrelevant for much of this period as it was set so low that it didn’t matter. If the average wage is $3 and minimum wage is $1, doubling it will have no effect whatsoever. Second, and more importantly China has had massive poverty reduction the majority of it was done well before 2000.

As we all know, “Made in China” was found on nearly everything we bought since the 1980s and certainly the 1990s. This period of time was when China’s economy really got going as they used their massive supply of cheap labor as an advantage over its competitors and dominated the unskilled labor market. This is the period of time that China brought over 400 million people out of extreme poverty and is key. Not post-2000.  By then, China had already created a robust labor market and had entrenched themselves into the global economy that they could afford to implement laws like minimum wage without much effect.

As you can see nearly all the poverty reduction occurred before 2000 in China

As you can see nearly all the poverty reduction occurred before 2000 in China

In has been documented that China has been faces strikes and labor shortages which can only happen when the labor supply is getting low. Talk of China reaching the Lewis turning point (when the pool of unskilled labor is exhausted and wages begin to rise) has been going on for a number of years and China has been losing jobs to SE Asia as their workers are now cheaper than China’s. For nearly all developing countries the question is how you get to the Lewis turning point, not what do you do once you are there. Yet this point is so often confused when minimum wage is brought up.

More on China and the Lewis Turning Point:

China had a competitive advantage in unskilled labor precisely because it didn’t have minimum wage laws. India on the other hand did have such laws and they ironically have had little progress reducing extreme poverty in relation to China. Those making the point as the Brazilan professor are driven more by ideology than what is really going on.

Similarly, one could make the argument that every time the backup quarterback plays the team wins so they should always play the backup quarterback. Yet when you find out that the backup only plays in the 4th quarter when the team is winning by a large margin, this is obviously a misleading conclusion. China reduced poverty first and then put in place minimum wage laws. Now that they economy is largely moving beyond unskilled labor, minimum wage has much less effect on the labor market and it looks as though poverty reduction coincides with a rising minimum wage. Though I cannot comment in as much detail in regards to Brazil, it seems to be a similar story as significant growth was achieved before increases to the minimum wage occurred.

In regards to place like Uganda where that growth has not yet occurred, minimum wage squander the ability of businesses to hire large pools of unskilled workers. Excessive labor laws intended to help workers price their workers out of the market altogether and businesses go elsewhere. 31 Bits pays above the minimum wage in Uganda so labor laws don’t necessarily make it impossible to hire the poor but at the same time Bits is not a model that will be able to hire large quantities of workers to really make a difference in the labor market.

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