WASHINGTON – The World Bank has issued a new report encouraging lower minimum wages and stronger hiring and firing powers for businesses in developing countries. The recommendations, made in a draft of its influential World Development Report, are part of a package promoting labour market deregulation which, it is argued, is necessary to prepare countries for the changing nature of work. Ironically, the proposals come at time when NGOs and global unions are increasingly gaining traction in pressing for minimum wages and other worker rights in developing apparel manufacturing hubs such as Myanmar, Bangladesh, Cambodia and Vietnam.
A working draft of the bank’s influential World Development Report, out in the autumn, refers to labour market regulations as “burdensome” and calls for market deregulation to improve flexibility.
“… labour regulations try to do too much and act as a social protection system, including ensuring a minimum income or substituting for unemployment benefits … in many cases, they impose a high cost on firms and society by excluding many, especially youth,” says the report. “While there are cases when these regulations set necessary rules, they can also be excessive in other cases.
“High minimum wages, undue restrictions on hiring and firing, strict contract forms, all make workers more expensive vis-à-vis technology.”
A major argument put by the paper is that many people in developing in countries work in the informal sector and therefore do not benefit from worker protection schemes, although one could argue that organisations such as the ILO and Industriall Global Union have made significant progress in bringing about formal working conditions and associated worker benefits.
The World Bank also calls for links between minimum wages and productivity in the paper. “One of the tools that merits rethinking is minimum wages,” says the report. “The main objective of a legislated minimum wage is to ensure a fair remuneration to workers that protects them against ‘abuse’ from employers who may have market power. In part due to weaknesses in the social protection system, the minimum wage has also become an instrument to ensure a living wage. But the minimum wage can affect, depending on the level, (formal) job creation as a largely uniform minimum wage is applied to firms of varying productivity. It can also have important distributional impacts, adversely impacting youths, for example.”
Conventional economic theory has it that higher wages lead to less employment, although such theory has rarely been borne out in practice. China, for instance, now has some of the highest paid textile workers in the world yet the country’s textile sector is booming, using its highly skilled, well remunerated workforce to move into new high value added areas such as technical textiles.