Minimum Wage as a Tool for Poverty Reduction

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SEATTLE — Research from the International Labour Organization (ILO) reports that 90 percent of all countries have legislation that institutes a national minimum wage. From less than $1 an hour in Russia to nearly $18 an hour in Australia, the minimum wage is considered to have varying degrees of value globally.

Certainly, there are many cases presented both in favor and against the minimum wage, most of which revolve around its potential to affect employment rates. Advocates will claim that increases in the minimum wage would lead to no adverse effects. Adversaries will claim that the increase in labor costs will lead to layoffs and thus, higher unemployment.

There is plenty of data supporting either side, leaving most curious people floundering without an irrefutable statistic to clutch. The reality is that there is no one certain answer, only trend analyses that point to a spectrum of correct answers. When national economies vary so widely, it should come as no surprise that the effects of a floor wage would be dependent on the labor market in question. It will depend on the general effect of a wage change on things like household consumption, investment and net export.

Noting these matters, the most recent ILO Wage Report (2014-15) makes a positive case for minimum wages specifically in addressing wage inequality — an important issue in developed and developing nations alike.

Global wage growth itself has varied over the past decade. In fact, emerging and developing nations have largely been responsible for the global increase, while developed nations have remained relatively stagnant in that realm. However, the overall increase of real wages in a nation does little to address nationwide poverty for the people who are most vulnerable to it. The ILO study shows that there is a lack of legislation in place to control wage distribution. As a result, there’s widespread wage disparity amongst key demographics.

ILO reports wage gaps between men and women, and national and migrant workers in nearly all observed countries. Recent research suggests that decent minimum wage policies contribute effectively to reducing this inequality. For example, in Turkey, the introduction of a mandatory minimum wage in 2004 was a crucial component in “explaining the wage growth at the low end of the wage distribution, which reduced wage inequality and also reduced excessive working hours.”

Data reveals that inequality often starts in the labor market. Thus, utilizing intelligent labor market policies, including a national minimum wage, is an indispensible force in ensuring that no one is left to struggle in poverty while others benefit from economic wellness.

Another labor market policy worth mentioning is collective bargaining. In many cases, high minimum wages are the result of weak collective bargaining systems in countries. Where collective bargaining is strong, people are covered by the agreements, making high minimum wages less necessary. However, the economic system and guaranteed equality is strongest when minimum wage policy and powerful collective bargaining systems combine. It is strongest in these cases because it is better able to withstand the chaos of a changing economic system.

In 2005, Uruguay’s government adopted a new strategy to address the trend of wage deterioration in the country. They established rounds of collective bargaining, which led to many agreements that were unanimously approved. They also established wage councils, whose responsibilities included establishing sectorial and federal minimum wages. The result was an overall 9.1 percent real wage increase within the first year, as well as a notable decrease in wage disparity and a 13.7 poverty reduction.

Since wage is the largest source of income for households in developed nations, it is self-evident why wage regulation is an important measure to take in ensuring economic equality. Yet the bottom 10 percent of households in these countries find social protection transfers representing more of their incomes than wages. These social protection policies, which include active support in the job search and childcare subsidies, matched with fiscal policies like the minimum wage that make their jobs more lucrative would be the most successful path to economic growth.

Similarly, emerging and developing countries find that wages represent a much lesser portion of average household income. With governments that do not provide extensive programs to aid these households in success, the minimum wage, collective bargaining and other similar policies become the driving force in lifting households out of poverty.

Alexis Viera

Photo: Flickr

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Alexis Viera

Alexis is originally from Belleville, NJ, but is currently living in Providence, Rhode Island, whilst studying at Brown University.

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