MANY ARGUMENTS have been advanced for the implementation of minimum wage legislation in Barbados. While I support this call on moral and social grounds, there are several compelling reasons against implementing a minimum wage.

Wages, like most prices in the economy, move to balance supply and demand – in this case, supply and demand for labour. A high minimum wage set by legislation would prevent this otherwise natural adjustment. Any first-year economics student will tell you that when the price of a good rises, demand for that good declines. Excess supply of a good also drives down the price. Labour is no exception.

However, the institutional rigidities in the Barbadian labour market, such as unionisation of workers and long-term contracts, help to mitigate the effects of low wage rates being set by comparatively low labour demand by affording workers various protections.

Non-unionised workers, those on short-term contracts and casual workers are most likely to be negatively affected by minimum wage legislation. If employers have to pay more for a resource, they will simply hire less of that resource, therefore some low-wage workers would earn more but others might end up unemployed.

Another consequence of minimum wage legislation is that the nature of the contracts employers offer to workers could also change. Employers, whose objective is profit maximisation, will evaluate the trade-off between offering employees long-term (two- and three-year) contracts with associated non-salaried benefits such as leave with full pay and "sickbays", versus offering better-paid but short-term or seasonal contracts.

Flexible contracts

The attraction of flexible contracts implies that over time, employers will respond to minimum-wage legislation by offering more short-term contracts.

Increases in minimum-wage rates would also provide an incentive for employers to invest in more labour-saving technology. The industry which would be most affected in this case would be manufacturing, where high wages would make it more profitable
to purchase complex machinery.

Given the low and declining rate of new jobs in Barbados, if any of the effects discussed so far were to occur, singly or jointly, the dynamics of unemployment duration would also vary.

This has implications for the benefits paid by the unemployment insurance scheme; on average, lower-wage workers or contract workers formerly on long-term contracts would be unemployed for longer durations each year.

Since wages play a role in supply as well as demand, the composition of the labour force could change. A job opening posted at $60 for an eight-hour workday attracts a larger pool of applicants than the same opening posted at $25 a day.

A more skilled or qualified worker might displace the person who would have gotten the job at the lower wage. While a living wage might benefit those at the bottom of the economic ladder in the short run, over the long run, those who are already relatively better off might displace these workers.

To sum up, this discussion shows that minimum wage legislation does not necessarily improve the welfare of all low-wage workers in all circumstances. Indeed, it could hurt some of the very people it is designed to help.