Increase the minimum wage increase the GDP??

One of the of the ideas that I’ve been pondering about during the week is the idea that an increase by increasing the median wage through for instance increasing the minimum wage. Ostensibly it is a possiblity as spending has been linked to increased economic activity and thereby increasing one of the factors contributiong to the GDP. Such may’ve been the logic at play for the thousand dollar payment to every Australian taxpayer in 2009. However what about if we do a little comparison to find out if increasing the minimum wage would increase the GDP?

Poland recorded some of the greatest increases in GDP growth over the 1990 to 2007 period. In fact according to the IMF, Poland’s annualised GDP per capita growth between that period is fourth highest in the world at 11.64 per cent per annum. OK so China and Vietnam are doing better but one is in good company. Moreover Poland was the only of the European economies not to dip into recession during the economic crisis. That’s from over 50 economies. It is also worth noting that the Poland’s current GDP  (PPP) per capita is 20,137 US dollars per annum. This is on par with ostensibly more afluent countries such as Portugal: 23,205 US dollars. However at just over 50 per cent of Germany’s figure: 37,936 US dollars. Concurrently if we compare gross average monthly wages between these three countries we see larger differences. Poland’s average wage is 759 US dollars per month, Portugal’s is 1079 US dollars whilst Germany 2865 US dollars. In terms of percentages Portugal and Germany have GDP (PPP) per capita annual rates respetively 15 and 88 per cent higher than Poland. However with respect to monthly incomes Portugal’s median wage is 42 per cent higher than Poland. Whilst Germany’s figure is 377 per cent higher than Poland.  Although I do not want suggest that there is a causality between the levels of GDP and a median wage, one has to ask the question why is there such a difference between the two figures?

Without considering the economics increasing the minimum wage leads to a more satisfied workforce. This in itself creates an economic benefit in productivity of the workforce. However if one has worked hard one’s wages should surely increase not only as an incentive but as a reward.

The fact that there is such a difference between performance and benefit in this instance is important as it shows that all the benefits of a roubust economy are not transfering to Poland’s labour market. One can also argue that this is a hiderance and a weakness in the distribution of income. By weakness I understand the lower incomes, especially ones that osillate around the poverty line contribute to the formation of an underclass, which in itself is a hinderence. It can be argued that increasing the minimal wage will not only aid in elevating poverty but will also have a positive effect on GDP growths as there will be substantially more funds fueling the economy. However there needs to be enough political will for this to take place. What is important is a holistic picture for an overall heathy economy. Building an underclass by keeping wages low is not what I would consider healthy.

Would this result in investor flight and unemployemnt? I do not thinks so. Firstly increased spending that would follow on from increases in incomes would directly stimulate the economy, this economy would have more participants in it and flow on benefits for all sectors. Would investors shy away from investing in Poland. I do not think so. One reason is that much of the investment in this 40 million dollar market is direct, via for example Poland being a host to a foreign company’s operations. The amount of FDI that Poland receives is on par with Japan and India, increasing minimum wages to 1000USD per month will still afford substantial economies of scale for these producers.

I guess the real question should be would increasing the minimum wage negatively impact GDP growth. I think I presented enough arguements here to show that this is not the case. A gradual increase to a minimum wage of say 1000 USD in Poland should be viewed as an investment in the health of the economy and the its people.

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