The Income Effect of Minimum Wage for the Underclass: Is It Positive in China?

Abstract

The ongoing debates on the impact of minimum wage have largely focused on the policy's employment effect for its theoretical implications, but the real question at stake here is its income effect, that is, whether or not it can increase the income of the underclass. Previous efforts have mostly relied on various forms of market imperfection to verify the theoretical integrity of this policy, whereas in this article we have raised another Marxian perspective, emphasizing the positive check of minimum wage on overtime work. Classical economists have long recognized the vulnerability of the working class when faced against capitalists, but only Marx has paid special attention to the complicated interaction between hourly/unit wage rates and the length of the working day, proposing that low wage rates would not only hurt workers by forcing them to work overtime, but that it would also hurt the capitalists as a class once large-scale labor degradation kicks in, endangering the very existence of a well-functioning working class for them to employ. Both the inherent conflict of interests between individual capitalists and capitalists as a class and workers' systematic disadvantage against capital serve to call for the intervention of a “visible hand” which is the establishment of a minimum wage. A theoretical model has been proposed to formalize this wage-hour mechanism for the underclass, emphasizing the special constraints they face when making labor supply decisions. We have discussed three different types of income effect, explaining how workers' income might increase with minimum wage and how firms might also benefit from such a process.