I’ve been requested by a reader of this Weblog to take a look at “hyperwage theory.” In response, I’ve decided to review Street Strategist’s (SS) series of articles in Business World presenting this theory. I think it will prove to be instructive illustration of the usefulness of basic economics. Note: Not being a Business World subscriber, I requested a copy of the collated articles personally from SS (firstname.lastname@example.org), so if want a copy I suggest you do the same.
My interest was piqued by the following:
If you have a PhD in economics, ah, there you are. My ideal audience. Why? Because by this time, with your PhD you have shall been brainwashed by the theories of economics. And I consider it a good challenge to turn your entire education head over heels. If you hear me out, and afterwards, you still say I’m an economic idiot, I always was. (p. 9)
Hmm. I have a Ph.D. in economics. And am directly insulted as a voluntary victim of brainwashing. In fact the entire work is one long slanderous tirade against economists. We’re in good company then – astronomers have been vilified by Velikovsky, archeologists have been damned by von Daniken, biologists have been bashed by any number of creationists. What’s new? In the following though I have decided not reciprocate SS, as I have recourse to infinitely superior tools of logic and evidence.
First, let’s look at the basic claims of hyperwage theory:
The minimum wage shall be set to a level that shall give purchasing power to the minimum wage earners, including domestic helpers, unlike current levels wherein the domestic helpers have almost zero purchasing power. A hyperwage resulting in real purchasing power will stimulate domestic demand which in turn will stimulate production which in turn will stimulate employment. This domestic demand, under the power of the economic multiplier will result in increased production of goods or services which in turn will result in more employment in a positive upward spiral.
The theory rests on the proposition that hyperwage does not automatically result in the same amount of hyperinflation in a Third World country. The logic for this is that many goods and services in Third World countries are already being sold at First World prices. (p. 12)
For discussion purposes, the minimum wage shall be set to be P20,000 per month for domestic helpers; about P70,000 for fresh college graduates. This is deliberately set comparable to Hong Kong and Singapore to avoid the labor wage arbitrage that is causing our school principals to work in Hong Kong as domestic helpers.(p. 14)
To back up his claim that wages across countries are misaligned, SS argues:
Why not equal pay for an equal amount of work? Or better stated, equal working hours to buy the same amount of goods? (p. 76)
He argues moreover that price increases due to hyper minimum wages will not increase prices of other commodities (much):
If the minimum wage of the domestic helper rises from P2,000 to P20,000, or ten-fold, will those assets also rise by ten-fold? Your computers, your TVs, your stereos, your cement, and everything, think about them. Where were they manufactured and what are the prices of these goods in the First World countries? And then think about your domestic helper. If she has P20,000 how many stores and how many products will benefit from this purchasing power? Will there be deflation? No? Will there be inflation yes, and I welcome it. Think about this. Make a matrix, a table of comparison of prices before Hyperwage and after Hyperwage. Will your HP Compaq Tablet PC currently worth P100,000 rise ten-fold to P1 million? Or will it be lower because many people can now afford to buy them? Higher volume, lower price. Think, go ahead, think. Think of al lteh [sic] product you see in the world. Will oil prices rise ten-fold? Cars? Nokia? Aircons? (p. 95)
Before I proceed, let me throw it back to you, faithful reader. Are any of these claims valid? If invalid, how would you go about refuting hyperwage theory? This exercise is a great illustration of the usefulness of economics - as device for rigorously identifying bad economic policy. So I'll post my evaluation later to give yourself a chance to exercise!