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MICRO PROJECT
Do we need the government to ensure a minimum paycheck, or would
low-wage workers and the economy be better off without this policy?

UEH- International School of Business

PE-T12324PWB-3 - Group 10
Dr Le Trung Thanh

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 TABLE OF CONTENT
I. Abstract …………………………………..…………………………………….…………… 4
II. Introduction …………………………………..…………………………….…………….… 4
III. Discussion …………………………………..………………………………………….….… 5
3.1. Why do we need the government to ensure a minimum paycheck?
3.2. Counter argument: Why would low-wage workers and the economy be better off without
government intervention?
IV. Conclusion …………………………………..…………………………………….………… 9
IV. References ………………………..…………………………………….…………....……… 9
V. Appendix ………………………..…………………………………….……..……..……… 12

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 I. Abstract

The growth and stability of the economy depend mostly on the government, as its policies
can influence the economy’s outcome. There has long been discussion about whether the government
should ensure a decent paycheck for low-wage workers and whether the economy would be better
off without its intervention. This paper is going to explain the reasons why the government should
set a decent paycheck in order to make sure that the economy will be stable and controllable, with
evidence and illustrations from Vietnam. The minimum wage in Vietnam has brought a lot of
benefits, including a decrease in conflict in enterprises and the growth of the economy. Hence, it is
believed that the government should always interfere with wages to get a better result.

II. Introduction

The discussion surrounding the necessity of government intervention in ensuring a decent

paycheck for low-wage workers is a topic of significant relevance. Historically, labor laws have
primarily emerged in response to employers' attempts to restrict the power of workers' organizations,
as employees sought improved conditions and rights to enhance their standard of living. The
resulting increased costs for employers due to workers' demands often led to chaos, necessitating
government intervention. Over time, various labor laws were enacted to address these issues.

In the context of minimum wage policies, it's essential to consider the origins of labor laws.
The first origins of labor laws were enacted in Kenya; they were associated with the colonial
government's quest to pass legislation that would ensure adequate and cheap labor for the emerging
agricultural, industrial, and service industries (Ochieng, 2019).

Recent global events have reinforced the importance of government intervention in labor
markets. The devastating impact of COVID-19 on the world's economy is undeniable. Furthermore,
ongoing international conflicts, such as the emergence of World War III and the wars between
Ukraine and Russia, have created additional instability in the global labor market. Notably, the
government of Vietnam has taken commendable actions to address these issues, particularly in the
labor market. Their efforts have shown positive results, leading to a decrease in unemployment rates,
a gradual decline in underemployment, and an increase in average worker incomes.

This report aims to explore the crucial role of government intervention in ensuring both
economic growth and fair wages for low-wage workers. It sparks a debate on whether such policies

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are indispensable or if an alternative approach would be more beneficial for both the workforce and
the overall economy. This presentation will illustrate how important the government's role is in
ensuring the growth of the economy combined with workers' jobs and fair wages.

III. Discussion
3.1. Why do we need the government to ensure a minimum paycheck?

a. The Importance of a Living Wage:

A crucial reality is that without government intervention to establish a decent minimum

wage, the quality of life, often referred to as a "living wage," is at risk. A survey on the life situation,
employment, and salary of workers in 2023, announced by the Vietnam General Confederation of
Labor (Confederation of Labor) on August 8, revealed that 75% of the workers surveyed reported
that their earnings were insufficient to cover basic expenses. This financial shortfall has forced many
to frequently borrow money, live in constant fear of financial insecurity, and face threats. (Hằng,
2023). Furthermore, when wages are insufficient to cover minimum spending, people will struggle to
afford necessities like food, clothing, and housing, ultimately leading to poverty. In the United
States, for example, a family of four, with two working adults and two kids, would need to work
more than 98 hours each week per adult to make ends meet.

b. The Poverty-Promoting Consequences of Low Wages:

Low minimum wages are closely linked to poverty, a challenge that exists in every country,
including developed ones. Poverty prevents people from investing in their human capital, physical
well-being, and education (Yang et al., 2022). This limitation on economic investments results in a
less productive workforce. Many lower-income individuals cannot afford higher education, which
leads them to low-wage jobs and perpetuates their poverty. This cycle can push some to resort to
coping mechanisms like drugs or criminal activities, indirectly hindering economic growth and
increasing crime rates. Raising the minimum wage is a critical step toward breaking this cycle.
Verazulianti et al. (2021) stated that improving health and education in rural areas can promote
economic growth. Higher wages can attract professionals to isolated regions, ensuring better access
to fundamental services.

c. Benefits of Decent Pay for Businesses:

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 Raising the minimum wage offers several benefits to businesses. First, it increases worker
productivity. When workers are paid higher wages, their mental and physical health often improves,
leading to greater productivity. In fact, engaged workers are more likely to stay with their current
employer, which positively impacts businesses' development (Heinz, 2022). Additionally, higher
wages enhance workers' morale and work ethic, particularly with low-wage workers who feel that
their job efforts aren't keeping them out of poverty (Maverick, 2023). Therefore, in turn, a higher,
decent paycheck reduces employee turnover, cutting recruiting and training costs. According to new
benchmarking data from the Society for Human Resource Management (SHRM), the average cost
per hire was nearly $4,700. But many employers estimate the total cost to hire a new employee can
be three to four times the position's salary, according to Edie Goldberg, founder of the Menlo Park,
Calif.-based talent management and development company E.L. Goldberg & Associates (Navarra,
2022). This demonstrates how raising the minimum wage can significantly decrease turnover, saving
costs for businesses.

d. Economic Growth through Decent Pay:

Decent wages also play a crucial role in bolstering economic growth. As people earn more,
they tend to spend more not only on basics but also on leisure, which injects money back into the
economy, generating a positive impact on GDP and related modest employment growth (Solution
series: Minimum wage increase: Costs, benefits and complexities 2019). This is especially valuable
during economic downturns, such as pandemics or crises, when economic activity may stagnate. This
also projected rise in consumer spending is critical to any recovery, especially when weak consumer
demand is one of the most significant factors holding back new hiring (A $10.10 Minimum Wage
Would Give Economy (and More Low-wage Workers) a Bigger Boost, n.d.). Recent research reveals
that, despite sceptics’ claims, raising the minimum wage does not cause job loss. In fact, throughout
the nation, minimum wage increases would create jobs. According to (How Raising the Federal
Minimum Wage Would Help Working Families and Give the Economy a Boost, n.d.), increasing the
national minimum wage from $7.25 to $9.80 per hour by July 1, 2014, would result in a net increase
in economic activity of approximately $25 billion over the phase-in period and over that period
would generate approximately 100,000 new jobs. In fact, the hike in the federal minimum wage
would create jobs in every state, as seen in Appendix Table 1. (Detailed state-level breakdowns of
the demographics of workers who would be affected by the increase—and the degree to which the
wages of various types of workers would rise—are available at
http://www.epi.org/files/2012/minimumwagestateimpact.pdf.). Though the resulting employment

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impact is modest in the context of the millions of workers currently unemployed nationwide, creating
tens of thousands of jobs would be a step in the right direction and would boost the economy.

3.2. Counterargument: Why would low-wage workers and the economy be better off
without government intervention?

a. Potential Job Losses:

Critics of minimum wage increases express concern that compelling businesses to pay higher
wages may result in job losses, particularly for low-skilled workers. If the minimum wage is set
below the equilibrium level, labor demand will exceed supply, resulting in a labor shortage and
increased hiring. If set moderately above equilibrium, the disemployment effects may be modest. It's
when the minimum wage substantially exceeds the market-clearing level that more significant job
losses are expected. as analyzed in Appendix Figure 2 (Detailed Supply-Demand Analysis of the
Minimum Wage - are available at https://www.researchgate.net/figure/Supply-Demand-Analysis-of-
the-Minimum-Wage_fig1_252821824). A 2019 study from the Congressional Budget Office
estimated that raising the federal minimum wage to $15 per hour by 2025 would likely result in 1.3
million workers losing their jobs. (The Effects on Employment and Family Income of Increasing the
Federal Minimum Wage, 2019)

Therefore, when labor costs increase, employers may respond by cutting staff, reducing work
hours, or automating tasks, which can lead to unemployment or underemployment. Firstly, faced
with higher labor costs, some employers may respond by laying off workers and leaving positions
unfilled. Low-wage jobs like cashiers, cooks, and cleaners are seen as most at risk. Cuts are more
likely in industries with thin profit margins like restaurants, retail, and agriculture. Moreover, as an
alternative to layoffs, employers may reduce the number of hours staff can work. Meer and West
(2013) found that a 10% increase in the minimum wage was associated with a 1.5-2% reduction in
hours worked by employees earning near the minimum wage. Workers would then see lower take-
home pay even with a higher wage.

Moreover, firms or employers may also find some other ways to circumvent the law to ensure
revenue. If the government does not stipulate specific penalties for violations, it will create an
opportunity for firms and employers to break the rules and create some disadvantages for low-wage
workers. For example, the countries in Southern Europe or the Iberian Peninsula, which are with
quite serious political instability (Châu, 2020), possess a massive underground economy, or "No
Observed Economy" (NOE) (VnExpress, 2019). "People participating in unobserved economic

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activities do not pay taxes, but they produce products like normal companies," Cristina Terra -
Professor of Economics at Essec Business School (France) stated (Constable, 2017). In this no-
observed economy, employers often pay workers hidden wage allowances, which are used to avoid
taxes and costs incurred. In this case, businesses may respond to an increase in the minimum wage
by cutting illegal or shadow payments while maintaining overall remuneration on paper.

b. Economic Impact on Small and Medium Businesses (SME):

Small businesses, unlike larger corporations, often have limited financial reserves and less
flexibility in managing increased operating costs. While large firms may be able to automate or take
on debt, small businesses have less capital flexibility. Additionally, while large firms can absorb
higher labor costs through lower profits or rising prices, small firms have less scope to adjust
margins and limited options to reduce labor input (Aaronson et al., 2018). Therefore, when
confronted with mandated wage hikes, they may struggle to absorb the added labor expenses, putting
financial strain on their operations. This financial burden can impede their ability to invest in growth
or sustain their business.

Moreover, in extreme cases, small businesses, especially those teetering on the edge of
profitability, may face the risk of bankruptcy when confronted with significantly higher labor costs.
Meeting increased wage mandates may simply become infeasible for them, potentially leading to
business closures, job losses, and a reduction in the diversity of business options available to
consumers. For instance, Dunkelberg (2021) provided a case in point. Consider a small pizza parlor
with ten employees, each earning an average of $10 per hour and working 2,000 hours annually. This
results in a total labor cost of $200,000. The parlor generates revenue by selling 100 pizzas a day at
$10 each for 365 days, amounting to $365,000. After deducting labor costs, there's $165,000
remaining to cover expenses like rent, utilities, and the owner's income. Now, if a minimum wage
increase to $15 per hour were mandated, it would raise labor costs by $100,000, bringing the total
labor expense to $300,000. This would significantly impact the business's financial stability, pushing
it toward the brink of bankruptcy. In such a scenario, the owner would face the daunting choice of
either shutting down the business or making substantial operational adjustments to cope with the
added costs, highlighting the severe challenges that small businesses may encounter due to minimum
wage hikes.

c. Inflation and Cost of Living:

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 A minimum wage policy carries the potential risk of exacerbating inflation. In the case of
government-mandated wages, employers must pay their workers more, which translates into higher
labor and production costs. Subsequently, businesses increase their prices in order to compensate for
their profit margins. As a result, the cost of living increases, which contributes to inflation
(Majchrowska, 2022).

‌When the inflation rate increases, it causes a chain reaction of consequences. Individuals'
purchasing power is lost as prices continue to climb, resulting in a fall in consumer expenditure. As a
consequence, firms face a decrease in revenues, which then directly affects the Gross Domestic
Product (GDP). A dwindling GDP translates into economic contraction and serves as an indicator of
recession (I. Team, 2023).

In such a severe scenario, governments must take remedial measures to compensate for the
economic downturn, such as providing stipends to citizens; reducing tax rates for a limited amount of
time, and lowering interest rates for businesses to stimulate economic activity, as can be seen during
COVID-19 outbreak (Enache, Asen, & Bunn, 2020). While these measures serve to alleviate the
economic crisis, they also lead to fiscal implications. With strained financial resources and reduced
tax revenues, the government budget balance decreased.

IV. Conclusion

In conclusion, while there are disadvantages to government-mandated wage, it is still greatly

beneficial for the government. The objective of a minimum paycheck is to guarantee workers a stable
baseline for their basic needs. Government intervention in guaranteeing a minimum paycheck can
also play a significant role in promoting social equality, social justice, and the overall well-being of
the employed and those in need of social security. Moreover, setting an income standard could result
in a more balanced economy. Additionally, utilizing wage regulation in isolation can be insufficient.
Instead, it should be implemented as a supplement and reinforcement alongside other economic
policies. There are several measures that can be used to tackle this issue, including pro-employment
policies, social transfers, and creating an enabling environment for sustainable enterprises (Chapter
1: What is a minimum wage, 2015). Besides incorporating multiple approaches to ensure a minimum
paycheck for the workforce, factors such as local living expenses should also be taken into
consideration to produce the desired outcomes (Minimum Wage Is Not Enough - Center for Hunger
Free Communities, n.d.).

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 V. Reference
Living Wage Calculator. (n.d.). https://livingwage.mit.edu/articles/99-a-calculation-of-the-
living-wage
Tuerck, D. G., & Bachman, P. (2023). The economics of a higher minimum wage in
Massachusetts. ResearchGate.
https://www.researchgate.net/publication/252821824_The_Economics_of_a_Higher_Minimum_Wa
ge_in_Massachusetts
Hayes, A. (2023, May 30). Does raising the minimum wage increase inflation? Investopedia.
https://www.investopedia.com/ask/answers/052815/does-raising-minimum-wage-increase-
inflation.asp
Ochieng, O. J., PhD. (2019, November 21). EVOLUTION OF LABOUR LAW IN KENYA:
HISTORICAL AND EMERGING ISSUES.
https://www.iprjb.org/journals/index.php/IJLP/article/view/1014
Hằng T. (2023, August 9). Đa số người lao động lương không đủ sống. thanhnien.vn.
https://thanhnien.vn/da-so-nguoi-lao-dong-luong-khong-du-song-185230809012119687.htm
Yang, Y., Zhou, L., Zhang, C., Luo, X., Luo, Y., & Wei, W. (2022). Public health services,
health human capital, and relative poverty of rural families. International Journal of Environmental
Research and Public Health, 19(17), 11089. https://doi.org/10.3390/ijerph191711089
Verazulianti, V., Dawood, T. C., & Zulham, T. (2021). How important are health and
education in boosting sub-national economic growth? Journal of Socioeconomics and Development.
https://doi.org/10.31328/jsed.v4i1.1762
Heinz, K. (2022). 6 reasons why employee development is key. Built In.
https://builtin.com/company-culture/employee-development
Maverick, J. (2023). What are the pros and cons of raising the minimum wage? Investopedia.
https://www.investopedia.com/articles/markets-economy/090516/what-are-pros-and-cons-raising-
minimum-wage.asp
Navarra, K. (2022, April 12). The real costs of recruitment. SHRM.
https://www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/the-real-costs-of-
recruitment.aspx
Adminmaster. (2019, February 8). Solution Series: Minimum Wage Increase: Costs, Benefits
and Complexities - The Fedcap Group. The Fedcap Group. https://fedcapgroup.org/solution-series-
minimum-wage-increase-costs-benefits-and-complexities/

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 A $10.10 minimum wage would give economy (and more low-wage workers) a bigger boost.
(n.d.). Economic Policy Institute. https://www.epi.org/blog/10-10-minimum-wage-give-economy-
wage-workers/
How raising the federal minimum wage would help working families and give the economy a
boost. (n.d.). Economic Policy Institute. https://www.epi.org/publication/ib341-raising-federal-
minimum-wage/
The effects on employment and family income of increasing the federal minimum wage.
(2019, July 8). Congressional Budget Office. https://www.cbo.gov/publication/55410
Meer, J., & West, J. (2013). Effects of the minimum wage on employment dynamics.
https://doi.org/10.3386/w19262
Châu B. (2020, May 1). Nỗ lực ổn định tình hình tại Tây Ban Nha. Báo Nhân Dân Điện Tử.
https://nhandan.vn/no-luc-on-dinh-tinh-hinh-tai-tay-ban-nha-post448737.html
VnExpress. (2019, February 16). Kinh tế ngầm trên thế giới. vnexpress.net.
https://vnexpress.net/khong-rieng-viet-nam-the-gioi-cung-dau-dau-voi-kinh-te-ngam-3881764.html
Constable, S. (2017, March 6). What is the shadow economy and why does it matter? WSJ.
https://www.wsj.com/articles/what-is-the-shadow-economy-and-why-does-it-matter-1488769322/
Aaronson, D., French, E., & Sorkin, I. (2018). INDUSTRY DYNAMICS AND THE
MINIMUM WAGE: a PUTTY-CLAY APPROACH. International Economic Review, 59(1), 51–84.
https://doi.org/10.1111/iere.12262
Dunkelberg, W. (2021, April 12). $15 Federal Minimum Wage Attacks On Small Businesses.
Forbes. https://www.forbes.com/sites/williamdunkelberg/2021/04/12/15-federal-minimum-wage-
attacks-on-small-businesses/?sh=598441a44e21
Majchrowska, A. (2022). Does minimum wage affect inflation? Ekonomista, 4, 417–436.
https://doi.org/10.52335/ekon/156331
Team, I. (2023, October 20). What causes a recession? Investopedia.
https://www.investopedia.com/ask/answers/08/cause-of-recession.asp
Enache, C., Asen, E., & Bunn, D. (2020, March 25). Tracking Economic Relief Plans Around
the World during the Coronavirus Outbreak. Tax Foundation.
https://taxfoundation.org/blog/coronavirus-country-by-country-responses/
Chapter 1: What is a minimum wage (2015, December 3).
https://www.ilo.org/global/topics/wages/minimum-wages/definition/WCMS_439072/lang--en/
index.htm

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 Minimum Wage is Not Enough - Center for Hunger Free Communities. (n.d.). Center for
Hunger Free Communities. https://drexel.edu/hunger-free-center/research/briefs-and-reports/
minimum-wage-is-not-enough/

VI. Appendix

Appendix 1. Here are some arguments to support the point that increasing minimum wages will
cause inflation from Investopedia:

“ Their rationale is that, in a free labor market, somebody may be willing to work a job for $10 per
hour. However, since the government mandates an hourly pay of at least $15, a worker cannot
competitively bid lower for the job and will drive higher product costs.”

“Regarding inflation, so-called wage push inflation is the result of a general rise in wages. According
to this hypothesis, in order to maintain corporate profits after an increase in wages, employers must
increase the prices they charge for the goods and services they provide.”

“Eventually, as goods and services in the market overall increase, higher wages will be needed to
compensate for the increased prices of consumer goods.”

(Hayes, 2023)

Appendix 2.

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 Figure 1. Living Wage Expenditures for a Family of Four (Two Adults and Two Children) After
Taxes.
(Adapted from Living Wage Calculator, n.d.)

What's important to note is that the living wage, which is what's needed for a decent life, is
higher than the poverty line, a measure used to figure out basic needs. Even in the best-case scenario,
state minimum wages only cover about 60% of the living wage for a family of two working adults
and two kids, like in Washington. This means that families making incomes between the poverty line
(around $26,500 for two working adults with two kids on average in 2021) and the living wage
(about $100,989 yearly for the same family size before taxes) might not have enough money and
support to meet their basic needs. The following bar chart illustrates the fractional share of income
required by a family of four, two working adults and two children. As stated from the chart, to cover
childcare and other expenses, a second working adult would need to earn at least $17,603 on average
when entering the workforce.

Appendix 3.

Figure 2. Supply-Demand Analysis of the Minimum Wage

(Adapted from Tuerck and Bachman, 2023, fig. 1)

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