Phelps' Help
Nepali corporate employers, whining at the pressure on revising up the minimum wage level, should consider lobbying the government for adopting a concept propounded by Edmund Phelps, this year's winner of Nobel Prize in Economics.
Though Phelps won the prize for his five-decade-old work in analysing inflation and unemployment, his more recent work arguing in favour of providing employment subsidy should be more relevant for Nepal . In his book Rewarding Work (1997), the Columbia University professor has argued against increasing the minimum wage rate and providing unemployment benefits and has instead suggested that employment subsidy should be provided.
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Edmund Phelps |
According to him, pressuring firms to raise their bottom pay rates will price many of the least skilled workers out of the market, thus reducing their employment. This, in fact, is what is happening in Nepal and explains the prevailing unemployment rate to a large extent.
His other argument is that it is better to pay people for working than handing them unemployment benefit. In fact, rewarding low paid workers is a social necessity as the social service of such workers as trash-pickers is very high.
According to his idea, firms employing low-wage labour should be paid a government subsidy for doing so. Higher the wage, lower should be the subsidy until it has tapered off to zero. Such subsidy should be paid to the firms once a year as a credit against corporate income tax. He also suggests that there should be no restriction on the firm to use the subsidy money. However, he points out that the competitive forces would quickly ensure that most of the subsidy will be paid out as direct or indirect compensation for the workers. Thus this idea should also be welcomed by the trade unions.
Also the government need not be averse to this idea. Phelps says wage subsidy will completely pay for itself because it will increase workforce participation and increase the tax revenue (through better reporting to claim the subsidy). It leads to lower unemployment as more and more of the low-skill people will be employed. More importantly, it lowers social costs such as crime, violence which are mostly associated with unemployment and resultant frustration. Employed people are more likely to engage in self development. According to Phelps, another direct benefit for the government is that such a subsidy will be cheaper to administer than the system of handing over unemployment benefit.
Of course, there are critics who say any factor of production should earn just as much as its marginal product (no less, no more) and this may be the reason that many governments in developed countries have not yet implemented Phelp’s prescription. But US has adopted a somewhat similar system known as earned-income tax credit. Even if the other countries have not adopted it, this does not mean that Nepal cannot lead the way. Who says we cannot start something that the developed countries have not tried.
