Value Based Minimum Wage

My layman’s understanding of minimum wage is that it is the amount of money one needs to be paid in order to survive in a money based society. Our current approach to setting such minimum wages focuses on the quantitative value of the money to be paid rather than what the money enables the individual to do. This approach couple with the process and governance around minimum wage provide a loophole for exploitation that is naturally pounced upon in a capitalist society. This article will explore a Value Based Minimum wage approach which i believe is a better way to look at the issue

Minimum wages have been defined as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”

International Labour Organization

The challenge of numerical based minimum wage

Traditionally minimum wage is set through a legislative process, broadly paraphrasing, this usually means that a political representative must raise the issue in a legislative body, the issue is debated and resolutions are made which may or may not result in the change of a previously set numerical value. The fundamental problem with this approach is that it requires constant monitoring of whether this figure is relevant at any point in time as prices are affected by such things as inflation, supply/demand and more. This constant monitoring never happens as legislative bodies are by their nature slow and methodical. Furthermore, it is not in the best interest of society to structure processes that require constant unending legislative arguments, time is humanity’s most valuable resource and it can never be recovered.

The Alternative Value Based Minimum Wage Approach

A reasonable alternative to the aforementioned method is to look at which activities an employee must do to have a reasonable quality of life, consider the method of valuing these activities and allow the numerical renumeration to automatically change based on these factors with a buffering factor to allow for predictability which is essential in corporate forecasting.

This proposal of course is not the magic bullet, it has it own faults that must be addressed but on the balance of play, I believe that it provides better benefits to society as a whole. At the very least, it shifts political discussion on minimum wage from ‘how much’ and ‘what can you do with it’.

Considerations in setting a value based minimum wage

Wages and Salaries are a major part of business expenditure and as such it is a hot button topic; any consideration on the value of wages must balance the need of the employer against the need of the employee. In the modern competitive world, more often than not, the employer’s consideration takes precedence as wages are a low hanging fruit to cost cutting in business expenditures. An important aspect of consideration when it comes to minimum wage is the percentage of lower income earning employees on the whole corporate wage bill. My early inclination is that this is actually quite low such that the net effect of minimum wage on the current financial metrics is minimal.

Another consideration to make also relies on the nature of the employer, one wonders if the minimal acceptable payment for someone who is working at a mom and pops business should be the same as that of a large multinational conglomerate. Should there be a ratio factor that ties the minimum earning individual to the maximum earning individual in a corporate body? The basis of this query is that often upper-level management will get bonuses for figuring out how to cut costs but lower earning employees may actually get their earnings cut as part of cost cutting exercises. By tying in a maximum earner to minimum earner ratio in wage legislature, the decision to cut wage costs becomes more carefully weighed by upper management in corporate organizations. The downside of this idea however is that cost cutting exercises become validated as corporate bodies say everyone is affected equally yet upper income earners main still gain more in bonuses and benefits.

Assumptions of a value based minimum wage

The fundamental assumption that a value based minimum wage approach has is that any employed individual has a set of parents and at least one child and calculations must allow this quadrant to survive. I believe that this is critical as it considers real world context of employees and ensures that renumeration is practical. It must be understood however that once this approach is taken, consideration of social securities such as retirement funds and childcare become inevitable. The goal is to fairly compensate without bloating corporate expenses.

An alternative look at this would be to use real-time information of a person’s dependents to fine tune their minimum earnings. The benefit of this is that if one has many dependents they would not necessarily be punished for having a large family. On the other hand such an approach requires government to obtain a significant amount of individual information such that considerations for privacy become a huge factor. It is in this regard that I believe the first approach carries slightly more merit

Parameters for a Value Based Minimum Wage

At the very minimum one must be able to afford to feed one’s family, pay bills, travel to work, be healthy enough to do that work well, remain with something that helps them improve (savings, education) and have some degree of leisure. These considerations must be made with an awareness of how other social interventions are made by government; for example, if government already has a robust public medical health system, then it makes no sense to duplicate the benefit. From this basic assumption of life, we build our foundational parameters as:

• Medical Aid
• Food & Clothing
• Transportation
• Bills
• Self-Improvement
• Social Activity

Medical Aid

I consider medical aid as one of the trickier things to evaluate, on one hand, it would be an insult to provide only enough coverage for medical checkups and dental flossing and on the other hand, it would be monstrous to provide enough coverage for an experimental procedure for a rare disease. The sweet spot lies somewhere in between, possibly around the area where you can afford to have an operation after an accident. The said medical aid must cover both the employee and the core assumed unit family.

Food & Clothing

An interesting aspect of food and clothing is that there is a heavy element of cultural bias. Regardless of this however, i think the actual calculation of this parameter is easy to ascertain, what is more debatable is what should be included and how much of it. In the case of food for instance, should it be three meals and what consists of a standard breakfast or lunch and so forth? One thing that is certain is that there will be a need for a bread-basket index that tracks the value of food in time as well as some form of lifestyle index to track clothing costs. This parameter should be a calculation that is based on the core assumed family unit.

Transportation

Transportation is the most straight-forward parameter to consider. It is simply the cost of transport required for the average employee to get to work and back which is doubled to assume the child’s costs of going to school and back.

Bills

The are two types if bills that are important namely, rentals and Municipal Bills in particular (water and electricity); depending on what is possible within an economy, a case can be made for the inclusion of internet as a basic human need. The calculation of rentals should be based on the market averages for a 3-bed apartment and the municipal bill should also be the municipal average for a

Self-Improvement

Self-improvement speaks mainly to the ability to save for a desire to pay to equip oneself with new skills. I believe that the ideal index to use that is easy to evaluate is to factor in a industry advice percentage of wage savings. for example, the current industry advice is that savings should be at least 15% of earning thus all that would be required is to add a +15% after other calculations.

Social Activity

Optimization Factors

It is worth taking into account as well the relative prosperity of the nation as a factor of minimum wage considerations. As a territory that is under governance increases in prosperity, it stands to reason that the lifestyle of the least paid individual must follow.

Time Elasticity: The period of time before the

Valuation of Parameters

The Value Based Minimum Wage Equation

Payout of the Value Based Minimum Wage

An interesting idea is that the calculated value of the Minimum wage does not necessarily have to be the paid-out value.

Concluding Thoughts

References

https://www.ilo.org/global/topics/wages/minimum-wages/definition/WCMS_439072/lang--en/index.htm