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As Connecticut Goes, So Goes China

Feb 28, 2012 -- Scottsale, AZ -- According to this news item, a group of workers were scheduled to testify this afternoon at a public hearing in the Connecticut legislature, urging lawmakers to raise the state's minimum wage. (I'm a little confused that one of the groups allegedly testifying in favor is a group of small business persons--which is what the article says in the first sentence. Typically, small business owners are a group that are opposed to minimum wage increases, but maybe it is worded poorly or I'm not reading correctly.) Regardless, the folks in Connecticut are seeking to raise the minimum wage from the current $8.25/hour in a two-step process, first to $9.00/hour in July of this year, and then $9.75 in 2013. Apparently another provision of the bill would tie the state's minimum wage to the rate of inflation.

At the very same time, half-way around the world, the city government in Shanghai, China has announced that it will raise the minimum wage by 13 percent, starting in April 2012 (according to this article). While the reason or reasons for the Connecticut law is not made entirely clear by the article (inflation in the U.S. has been quite low for the last few consecutive years), the Shanghai increase is to "ease a labor shortage and buffer the impact of inflation." The article goes on to say, "Severe labor shortages, sporadic strikes and rising living costs in cities have prompted wage hikes throughout China over the past two years..."

...Which makes me wonder why ... if there are severe labor shortages, why does the minimum wage need to be so aggressively increased? In my mind, labor shortages would cause a natural increase in the number of employers having to raise their wages in order to attract workers. Conversely, an over-abundance or glut of labor would have a depressive effect on wages -- more workers available, therefore, employers wouldn't need to pay as much for labor.

So what am I missing? If there are labor shortages, why is the government in Shanghai mandating a significant minimum wage increase? And, if there is a labor abundance in Connecticut due to the past few years of economic malaise, and the threat of 2-3% inflation on the horizon in the U.S., why does Connecticut feel a need to raise minimum wages? I'm baffled. Where are my economist friends to sort this out for me?

The opinions expressed are solely those of the author and do not necessarily represent those of WorldatWork.

Reader Comments
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Thu March 1, 2012 9:49 AMReport Abuse
Scott Boynton
Compensation Manager
Member Since: 1/1/2001
Comments: 56

I don't have any direct knowledge of wage practices in China, but my first thought was that China is still communist and it is possible that some or many employers might not be *allowed* to raise wages on their own to respond to labor shortages.  Jim clearly has more insight on the topic, and seems to be heading in the same direction as my annecdotal and bias-driven best guess. 

In Connecticut, from what I can tell in the very short article, it is primarily low-wage workers who are looking to the government to force their employers to pay them more.  They are no doubt feeling pressure from a struggling economy in general and rising gas prices in particular.  I am reminded of one of our friend Jim Brennan's laws:

"When the cost of living goes up, people expect pay to go up.  When the cost of living goes down, people expect pay to stay up.  People always expect pay to increase."

Like the CBO, proponents of minimum wages increases gravitate towards static analysis and assume that employer's behavior will not change in the face of increased costs.

Thu March 1, 2012 8:55 AMReport Abuse
Jamie Davis
Member Since: 1/1/2011
Comments: 2

As for CT, clearly noone is forcing the small business owners to only pay minimum wage so Jim's comment regarding the possibility that their motivation is to choke out competitors who do pay minimum wage is worthy of consideration.

Tue February 28, 2012 5:13 PM (edited 2/28/2012) Report Abuse
E Brennan
Senior Associate
Member Since: 4/19/1979
Comments: 590

Good questions, Ryan.

The CT article says, "...some small employers..." may support the bill.  Well, perhaps those business owners want to run for office.  Also, if your lowest paid worker earns $30,000 a year, it's no skin off your nose if the politically-driven minimum wage is hiked.  Maybe it will put some of your competitors out of business, if their economic business model is based on employing lowest-skilled entry workers; those like that with tiny profit margins will go broke or lose market share when forced to raise their prices to support the artificial entry wage floor hike.

Long story short, China is not North America.  They follow different rules there, have different customs and traditions, and apply very different political and economic policies.  "Free open competitive market" is a foreign term there, where the Communist economic dogma still rules all private and public behaviors.  Yes, the Special Economic Zones there are more Western-oriented than anywhere else, but they also remain tightly controlled by the State.   

In both cases, governments interested in being seen as the source of all good things tend to manipulate economic forces to create results of their choosing rather than to accept the self-balancing dynamics of academic Western labor economic thought.