What happens when Bahrain fixes a higher minimum wage for citizens than expats?

TDT | Manama         

The Daily Tribune – www.newsofbahrain.com

Reported by Mahir Haneef

Introducing a higher minimum wage for citizens than expats in Bahrain may cause businesses to prefer expats for jobs, say leading global economic experts on minimum wages.

Talking to The Daily Tribune, American economist David Neumark said, "What really matters is how much the minimum wage would push up the wages of these two groups of workers.

If their wages are similar to begin with, which I doubt is the case, then the lower minimum for expatriates would lead employers to substitute towards them and away from citizens."

Explaining the impact of setting a higher minimum wage for citizens on the economy and living standards, Mr. Neumark, who is a University of California Irvine distinguished professor of economics, said a two-tier minimum wage would create winners—those whose wages are raised and retain their jobs or hours—and losers—those whose jobs are eliminated or whose hours get reduced, or new entrants who find it hard to get a job.

There would be secondary effects, such as higher prices in sectors that use minimum-wage workers, he said. "The evidence on living standards is that poverty is not really reduced because of these offsetting effects," noted Mr. Neumark, who is also a former economist at the US Federal Reserve Board.

But Reilly S. White, an economist who is an associate dean at the University of New Mexico in the US, points out that there are countries where minimum wages don’t apply to foreigners and refers to the examples of Oman and Palau.

He noted that there are also nations, such as South Korea, where the minimum wage applies to foreign workers as well. The proposal for a separate minimum wage for expatriates and citizens would be unique, he added.

On the possible impact of implementing such a system, Mr. White said, "This will likely reinforce the two-tiered labour market: higher-skilled jobs, requiring higher wages, will be filled by citizens and lower-skilled jobs by expatriates.

The market will pose unique challenges for lower-skilled citizens and higher-skilled expatriates that will need further study." Justin Wiltshire, who has a PhD in economics from the University of California, Davis, and is an assistant professor of economics at the University of Victoria in Canada, thinks it is not a good proposal.

He said, "Differential minimum wages strike me as a bad idea. If employers are able to legally pay expats a lower wage than they have to pay Bahraini citizens, then they may fire Bahrainis and replace them with cheaper expat workers.

This would not be beneficial for Bahrainis. Instead, a common minimum wage for all sets a level playing field that encourages employers to hire the best available worker regardless of nationality."

Be Jobless or Burn Out?

Whether two-tiered or single, setting a minimum wage comes at a cost—a reduction in the number of jobs available, experts added. Mr. Neumark, who is one of the few global experts on minimum wages, said the introduction of a minimum wage would result in a decline in the number of jobs available for low-skilled workers.

"The evidence is slightly contested but overwhelmingly points to job loss for the lowest-skilled workers—and, importantly, the ones whom the minimum wage is most intended to help.

Some earn higher wages, of course, but jobs decline," David said. If the minimum wage is relatively low, the impact on the economy and the job market will be low and limited to low-skilled workers, he said, adding, "The higher it goes, the less true this is."

Mr. White agrees and points to the example of the US in 1966, when the country had the highest real minimum wage in the 20th century following the introduction of a law named the Fair Labour Standards Act.

"However, research showed that employment and annual hours worked fell for lower-skilled workers and African-American workers. The most vulnerable and low-skilled workers are likely to see the most disemployment effects in a regime with higher minimum wages," Mr. White said.

However, Mr. Wiltshire holds the opposite view and said the introduction of a minimum wage would not lead to a shortage of jobs. He explained, "In general, my research and that of many other economists has shown that minimum wages do not result in fewer jobs.

While introductory economics courses teach that markets are efficient and binding minimum wages will reduce employment, research in the real world suggests that employment is in practise unaffected by minimum wages and, in some cases, even goes up when minimum wages are raised."

Explaining further, Mr. Wiltshire said businesses raise prices to partially cover the higher labour costs and that firms often operate with a degree of labour market power that allows them to pay lower wages than they would be willing to pay if needed.

Living Standards: The Real Question

A higher minimum wage would have a positive impact on the lives of the workers, according to Mr. White.

He said, "Among many nations that have instituted the minimum wage, research has shown that it does have a positive effect on working-age families employed in the formal sector, reducing household poverty (in Brazil) and consumption inequality (in Thailand)." Mr. Wiltshire concurred and said, "Provided minimum wages are not set too high, the economic literature strongly suggests that minimum wages result in higher earnings for workers and do not result in lower employment or harm the economy."

As low-income workers spend a larger share of their earnings, local economic activity will likely increase, he said. "Some mild price inflation may occur, but this is generally an acceptable compromise given the other economic benefits of higher minimum wages," he added.

Mohamed Adel Fakhro, a Bahraini entrepreneur and Stanford alumnus, considers the minimum wage essential but quickly points out that it may not result in higher living standards as often portrayed.

"It is important for a society to have a minimum wage in order to ensure that people can earn a minimum standard of living.  However, setting this rate too high is not advisable because it will lead to an increase in unemployment by discouraging foreign investment.

Having two different minimum wages for locals and expats will have the opposite effect of what is intended. Rather than leading to higher salaries for citizens, it will lead to an increase in unemployment rates for citizens and an increased incentive to hire expats.

On the whole, in my opinion, this policy will not lead to higher living standards for citizens over the long term," Mr. Fakhro said. Bahraini MP Maryam Al-Dhaen said setting a minimum wage and constantly reviewing it is a necessity, along with controlling commodity prices. She added that the focus should be on Bahrainis, as setting a minimum wage for expatriates would also "lead to an increase in the rate of inflation."