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An increase in the minimum wage now seems certain, and one question I am being asked lately is, "Is this going to make the economy tank?" The answer, in short, is no.
The minimum wage is one of the most complex policy instruments in our economy. It makes jobs scarcer - but better. It makes local businesses (as opposed to international ones) more expensive - but can also make them more profitable, as it puts more money into the hands of their customers. It can ameliorate poverty by increasing wages of poor people at the expense of their wealthy employers, but it can also exacerbate poverty by increasing wages of non-poor people at the expense of struggling employers and poor consumers who are forced to pay more for basic goods. In a recent column, I registered myself among the skeptics - I am convinced that increasing the minimum wage now will do more harm than good to Israel's poorest citizens.
That doesn't mean that it will do more harm than good to Israel's rich.
Most of the sectors that drive the growth of the Israeli economy are virtually unaffected by the minimum wage. This is certainly true in the export-driven industries. Most workers in hi-tech, or in high-end international services, are already far beyond minimum-wage territory. An exception is tourism, which is a growing export-driven industry which has many minimum-wage employees.
Even among local businesses, the largest businesses tend to have the fewest minimum-wage employees. In fact, many of these employers would benefit from the increase, which would bankrupt their smaller competitors. Some people were amazed when Lee Scott, the CEO of US retail giant Wal-Mart, came out recently in favor of an increase in the minimum wage. I wasn't surprised at all.
Giant firms like Wal-Mart usually can't get away with paying minimum wages, so an increase in the minimum wage serves as a "cash-ectomy" for their competitors. (Of course, that wasn't the reason Scott gave the US Congress - he claimed that an increase in the minimum would give poor Wal-Mart customers more buying power, which could also be true.)
An echo of Scott's position can be heard in the statement of Manufacturers Association of Israel President Shraga Brosh, who was quoted in the Post as saying that "What is most important is the decision to set up a committee composed of employers, government and the Histadrut, which will follow the economy's capacity and condition and decide on the timing and size of actual raises to the minimum wage." Of course the "employers" on this committee will not be the tiny Mom and Pop business, which are actually threatened by increases in the minimum wage. In the same category are recent comments by Chambers of Commerce head Uriel Lynn who, like Scott, said that a minimum wage is beneficial if it increases disposable income. Again, Chamber of Commerce members tend to be the higher-end firms, affected by the minimum wage far less than their competitors.
As evidence that this development will not be disastrous for the economy, we may point out that in the same week in which a substantial increase in the minimum wage has become a near-certainty, the Israeli stock market has gone through the roof.
The irony here is that the advocates of the minimum wage often depict themselves as champions of the poor against the rich. Many poor people certainly will benefit from this change, but the minimum wage has minimal impact on the rich. Most of those harmed by it are poor people who will be thrown out of jobs and budding entrepreneurs who will now by stymied in their efforts to get ahead in life by starting small firms that compete with the giants by offering lower wages.
The writer is research director at the Business Ethic Center of Jerusalem (www.besr.org), an independent institute in The Jerusalem College of Technology. He also is a rabbi.
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