While the debate about minimum wages rages on in the United States after Barack Obama’s State of the Union, it is worthwhile to think about the role wage controls have in the context of economic development rather than equity. In America, the relationship between the minimum wage and economic health is largely determined by liberal ideas of fairness. We are frequently reminded that it’s not possible for a single-mother to feed her children on a minimum wage.
While in India worker equity is a far more important issue, especially as poverty abounds, I think the real merit of such regulation derives from prospects of economic growth. When considering government intervention, it is always worthwhile to consider market failure, without which standard theory tells us regulation has no place. There is plenty of literature that talks about asymmetric information and imperfect competition as reasons for regulation.
But Indians have a much more damning irrationality: we’re not selfish. Specifically, after a given transaction not only do we expect low-quality outcomes, we want low-quality outcomes. We call this kakonomics. LiveMint tells us more:
This much-needed term, coined by Gloria Origgi, Italian philosopher of the mind, is “kakonomics” (the best translation of the Greek word “kako” is, well, “screwed up”)—the apparently strange preference for low-quality outcomes. Simply put, in a kakonomic transaction, both parties implicitly agree that both the product delivered and the pay-off will be low quality.
Rationality—and game theory—suggests that in any exchange, people want to receive high quality pay-offs. In fact, even a man offering a low-quality product would prefer a high-quality pay-off— that’s what hucksters are about. But kakonomics is the triumph of mediocrity—low-expectation exchanges about which no one complains.
Suppose a newspaper asks me to write a 1,000-word article but will pay me only Rs 1,000 for it. If I agree to this (Rs 1,000, being far less than I think I should be paid, is a low-quality pay-off), I’ll quite likely pick up chunks from articles I wrote years ago, string them together and knock the whole thing off in half an hour. So I provide a low-quality product, assuming that the newspaper would also not expect me to wrack my brains and spend six hours over the piece. In most cases, my assumption would be correct, and it would be a classic kakonomic transaction. We would have connived on a mutually advantageous low outcome.
But what if my piece goes to a conscientious editor who is unaware of the tacit agreement? She points out errors and requests a rewrite. I would see this as a breach of trust and refuse. She, being conscientious, may then offer to work on the piece herself and improve its quality. But I would still feel betrayed. For, I would now have to see the piece again in its final shape—after she has made her changes—and will possibly need to make some further changes from my side. Our well-meaning busybody is threatening the soothing mediocrity equilibrium that kakonomics provides.
For, kakonomics—cooperation for the bad—dispenses peace and stability for all concerned in the short term. It’s also equally obvious that in the long term, the outcome can only be bad. As Origgi puts it: “each low-quality exchange is a local equilibrium in which both parties are satisfied, but each of these exchanges erodes the overall system in the long run.”
In most Indian cities, even the relatively rich come to expect the plumber to be late and the maid to be shoddy. A great way to embarrass bad service person is a generous tip, because they will inevitably feel bad about the bad work. On the other hand, in America (the productivity capital of the world), the lawnmowers and maids do a spick a spick and span job. And clients tip lavishly.
That is to say the whereas bad work violates the American social contract, good work violates the Indian counterpart. I expect this tacit consent to suboptimal expectations work transcends economics. Rarely will you hear an educated Indian talk well of politicians, regardless of party or persuasion. We expect mediocrity.
Productivity in India is a joke. A few years ago we visited Goa, India’s richest state by a killing. The back yard was canopied by beautiful trees. A team of gardeners was in perpetual employment clearing fallen leaves, not because of any abundance thereof, but because workers didn’t have a rake, let alone a powered blower. Indeed they were collecting the leaves one-by-one as if in a comic play.
But if the government required we pay our plumber a minimum wage, it would no longer be acceptable for him to work slowly and carelessly. It would no longer be acceptable for the painter to leave ugly white splotches on the corner. And it sure as hell wouldn’t be acceptable for nurses at government hospitals to be incompetent, lazy, or rude.
I suspect most of the productivity gap is concentrated at the lowest sectors of urban society, for which a minimum wage is better interpreted as a required productivity. But, LiveMint gave the example of a freelance journalist who would definitely be among India’s emerging middle class. The government can solve this by levying a payroll tax on hourly wages which would be indirectly levied as a consumption tax. This would have a similar effect on expectations of quality. It might also help with India’s revenue problem.
Government has a critical role to play in the face of market failure. But this is particularly true when human interactions violate the most sacred principles of a rich society. India cannot hope to get rich if we each continue to secretly hope for bad outcomes. If I may speculate, I believe this culture of despondence-cum-kakonomics percolates into our political culture, granting politicians the freedom to abdicate their social responsibility.
Indeed, one might imagine that competing political parties play this game. Jayalalitha tells Karunanidhi, “I’ll do a sufficiently bad job so you look good – just promise me the same”. This, unfortunately, seems like a Prisoner’s Dilemma – except the convicts are coordinating.
My proposal is sufficiently modest to be tested in small-scale experiments. A firm can charge more for its services on a random subset of its employees. This extra money would be kept away from the “treated” employees, so as to eliminate the productivity effect standard economic theory predicts of higher wages. Therefore, any change in outcome can be isolated to the client expectation of higher quality. This is an important point to stress. Economists have made the argument that if increased wages bolster worker ethic, a minimum wage would increase firm profits. But this theory falls flat because firms would realize this and update wages accordingly. The complex dynamics of kakonomics and client expectations are harder to refute.
I remember Tyler Cowen commenting on Keynesians and the “self-imposed minimum wage“:
In essence you are self-imposing a minimum wage on that market, but the employer is responding by leaving you jobless. (Analogous to “self-deportation,” a sarcastic wag might suggest.)
Is there a sense in which Kakonomics creates a self-imposed maximum wage? This would be a remarkable departure from standard economic models. Of course, in a very real sense there is is an abstract concept, but still perhaps a useful heuristic to think about development yardsticks in poor countries.
Minimum wages and payroll taxes in America are means of redistribution and fairness. In India, under the right conditions, they might become important drivers of supply-side growth. And they might help equity outcomes in the process.