How Would the Market for Labour Be Affected in the Gulf Countries - Example

Managerial Economics Table of Contents Contents 1 Introduction 3 1.1 Background 3 2 How would the market for labour be affected in the Gulf countries? 4 3 How would the market for labour be affected in India? 8 4 Would migrant Indian workers be better off or worse off or unaffected by this minimum wage? 10 5 Conclusion 12 6 References 13 Table of Figures Figure 1 - The effect of shift of the demand curve 5 Figure 2 - Excess Supply and Excess Demand 5 Figure 3 - Supply and Demand in Equilibrium at Salaries below minimum wage 7 Figure 4 - The resulting supply and demand imbalance 8 Figure 5 - Resulting Supply and Demand in India 9 Table 1 - Supply and demand in equilibrium at 5 million workers earning 1,000 Dirham each 6 Table 2 - Supply and Demand with 1,400 minimum wage and imbalance 7 Table 3 - Supply and Demand in India when salary of 5 million workers in the Gulf was below minimum 9 1 Introduction 1.1 Background A news article in New York Times in 2008 reported that the Indian government is pressuring Gulf governments to sign an agreement on minimum wages for over five million Indian workers working in the region. However, Gulf countries such as UAE that is already experiencing labour protest at that time rejected the proposal in fear that higher wages would result to escalation of prices of basic commodities in the region . India according to the news report is the largest exporter of labour in the Gulf region and benefitting from the billions of dollars being remitted by Indian migrant workers. However, despite positive economic outcome gained from migrant workers, the Indian government still seek much better conditions for its citizens and doing their best to persuade Gulf States to set a minimum wage through a bilateral agreement . The Indian government is aware of the risk that Gulf companies will simply replace their citizens with other nationality that are willing to accept the current or much lower wages but still willing to pursue its minimum wage proposal. The persistence according to the report is brought about by the belief that as a growing economic superpower, India’s demand will be given more weight by the Gulf States than the Philippines and Indonesia. Moreover, the Indian also believes that since it provides the largest number of workers in the Gulf, its bargaining power is stronger than other countries . However, the Indian government seem overlooked the law of supply and demand in its proposal as it never consider the impact of raising labour wages on the level of labour demand. The following sections discusses the effect of setting minimum wage for Indian migrants workers on Gulf countries labour market, the impact of such changes in India’s own labour market, and determination if migrant workers are better off or worse off or unaffected by this minimum wage. 2 How would the market for labour be affected in the Gulf countries? The law supply and demand according to states that when the price of certain goods or services rises, the demand for that goods or services falls. In contrast, the law of supply and demand also states that when the price of goods or services falls, the quantity of demand for such goods or services rises. The law of supply and demand therefore is the interplay between three factors – supply, demand, and price – and when the demand for a good or service outstrips the supply, prices rise and vice-versa . Moreover, there must be an equilibrium where the quantity of supply and demand are equal . According to , an increase in consumer income result to shifting of the demand curve to the right suggest an increase in purchasing power or buy more goods than before as shown by the supply and demand as shown in graph below. Figure 1 - The effect of shift of the demand curve Literally, equilibrium is a state of balance determined by demand and supply thus an equilibrium price is a the price at which demand and supply are equal to each other . The forces of supply and demand according to determine the equilibrium wage in most labour markets. Similar to prices of goods, the equilibrium wage occurs at the point of intersection between the labour supply curve and the labour demand curve. Another example of supply and demand table and curve are shown below: Figure 2 - Excess Supply and Excess Demand The above supply and demand curve according to is a supply and demand schedules of salt at different process. Here, the equilibrium is fixed at Rs 6 where there is equality between quantity supplied and demanded. The quantity demanded in the above supply and demand curve above are measured on the x-axis and price on the y-axis . DD represent the negative slope demand curve while SS is the positive sloping supply curve. Therefore, the intersecting points or unique equilibrium point represent the equilibrium price at Rs 6 , demand of 3 units, and supply of 3 units. It somewhat clear that when the price go above this point an excess of supply or surplus will occur while price will continue to fall until it reaches equilibrium price. In contrast, a price lower than this point will result to excess demand or shortage while price will need to rise until it reaches equilibrium price. In scenario where Gulf countries accepted the Indian government’s proposal and paid a minimum wage above the equilibrium wage to Indian migrant workers then the following may occur. Using data provided by after the Indian ambassador confirmed that skilled and unskilled workers in the UAE will be granted a minimum wage last March, 2011, the resulting supply and demand graph may be presented as follows. Table 1 - Supply and demand in equilibrium at 5 million workers earning 1,000 Dirham each Therefore the supply and demand graph can be presented as: Figure 3 - Supply and Demand in Equilibrium at Salaries below minimum wage Note that the point where the supply and demand curves intersects. The price at this intersection is the equilibrium price while the quantity is the equilibrium quantity. The equilibrium price in the above therefore is 1,000 Dirham and equilibrium quantity is 5. Therefore, if the price is above the equilibrium price, the quantity of goods or services supplied exceeds the quantity demanded resulting to surplus of the goods or excess supply . As shown in Figure 2, the price above the equilibrium price indicates excess supply while those below the intersecting point will cause excess demand. In similar manner, after the minimum wage takes effect, the demand for migrant workers will create an imbalance in the supply and demand for Indian workers as shown below: Table 2 - Supply and Demand with 1,400 minimum wage and imbalance Figure 4 - The resulting supply and demand imbalance The market for labour in the Gulf countries therefore will decrease and there will be about 2 million workforce surplus or excess supply. Note that supply of labour remains the same while demand for Indian workforce is reduced by about 2 million as their salary increase from 1,000 Dirhams to 1,400. This according to is about 40 to 50 percent higher than the 2008 to 2011 wage levels. Technicians and skilled workers wages on the other hand will increase to 950 Dirhams per month while painters and drivers will be given a minimum wage of 1,300 Dirhams. Other categories will get 1,400 Dirhams minimum wage. The demand for Indian workers in UAE therefore will be significantly less resulting to increase unemployment in India in the following years. 3 How would the market for labour be affected in India? Similarly, since the demand for labour in UAE decreased while unemployment in India increase, the market for labour in India will be severely affected by oversupply and low demand level as illustrated below. Using similar data while supply and demand in the Gulf is in equilibrium with salaries below the minimum wage, Table 3 - Supply and Demand in India when salary of 5 million workers in the Gulf was below minimum Considering the effect of imbalances in the supply and demand created in Table 2 then India will have to accommodate or divert the surplus of 2 million workers as shown below. Figure 5 - Resulting Supply and Demand in India The above supply and demand graph illustrates the effects of oversupply of Indian workers in India where supply quantity is at 7 while demand is at 5. The lack of equilibrium would therefore result to lowering of the price below 1,000 to increase demand and create equilibrium with both supply and demand intersecting in an equilibrium price. Note that low prices increase demand while higher prices decrease demand resulting to over supply or surplus. According to , increase in the market supply due to the increase in the quantity of providers in the market often causes the supply curve to shift down to the right. If no increase in demand, a decrease in equilibrium price and increase in equilibrium quantity will occur . India will undoubtedly experience the consequences of having its 5 million workers earn minimum wage in Gulf countries higher price of services often result to low demand levels. The surplus migrant workers therefore will be re-expatriated to India where they need to find work and accommodated in the Indian labour market where there is no sufficient demand. Unless these returning workers are quickly diverted and accommodated in another country’s labour market, the Indian government will need to provide jobs or create demands for additional workers. 4 Would migrant Indian workers be better off or worse off or unaffected by this minimum wage? As shown in Section 2 and 3, Indian migrant workers employed in Gulf countries would be better off with this minimum wage. For instance, their job security will be severely affected by the application of minimum wage or higher salary that would decrease demand quantity. According to stagflation occurs when the price level of goods and services rises resulting to unemployment due to companie’s dismissing employees as a result of lower income. On the supply side of the market, an increase in the wage rate often result to an increase in the quantity of supplied labour while a decrease in wage result to lower quantity of labour supplied. Similarly, an increase in the wage rate in the demand side of the market often result to low level demand for labour while a decrease in the wage rate increases market demand for labour . As noted in the news article in New York Times dated March 27, 2008, Bahrani companies already expressed their resistance over the wage increase while Majeed Al-Alawi, Bahrains Minister of Labour openly said that India should bar its workers travelling to the Gulf instead. Bahrain’s Minister of Labour also noted that the Bahrain companies are already looking for alternative source of workers in Pakistan, Bangladesh, and Nepal . A good example of the consequence of demanding minimum wage in terms of supply and demand was experienced by the Philippines when its government in 2007 demanded a $400 monthly minimum wage for Filipino maids working in the Gulf. According to its labour attaché in Dubai, the demand for Filipino maids decreased by half as a result of that minimum wage demand indicating that movement from equilibrium price often result to decreasing demand . Moreover, although India has a much stronger bargaining power compared to other source of workers, the Gulf at this time is experiencing inflation as a result of huge oil revenues and dropping dollar exchange rate thus it may be difficult for the Indian government to persuade Gulf countries to embrace their minimum wage proposal. Clearly, in both political and supply and demand terms, the Indian government minimum wage proposal for its citizens working in the Gulf region has a lot of negative implications. These in particular are the millions of migrant Indian workers who will likely lose their source of living in the Gulf and later to India’s economy that will eventually suffer the consequences of large-scale unemployment. 5 Conclusion The Indian government proposal to the Gulf States asking for minimum wage for its citizens is in effect beneficial to each of the 5 million Indian migrant workers in the Gulf. However, the law of supply and demand clearly states that moving above the price equilibrium will likely result to decreased demand and surplus or excess of supply. The interplay between these factors therefore should be taken lightly by the Indian government as increase in wages in the Gulf will likely affect its own economy. Since demand and supply in Indian workforce in the Gulf should be equal, their wages should be maintained within the point of equilibrium. Result of analysis of supply and demand curve in Section 2 and 3 suggest that raising migrant workers salary from 1,000 Dirham to 1,400 Dirham would lead to serious economic implications such as unemployment for some 2 million workers, repatriation, and eventual over supply of labour in the Indian labour market. If employers in different Gulf States actually accept the Indian government proposal then reduction of workforce will be imminent due to insufficient company income. The demand for migrant workers from India will also decrease as employers will look for other source of cheap such as Pakistan, Bangladesh, Philippines, and others. Moreover, repatriated workers who were dismissed by their employers will have to find jobs in India creating another supply and demand imbalance in the Indian labour market. As the demand for Indian workers decrease in Gulf countries, the Indian labour market will likely go through a series of supply and demand adjustment such as low wages to increase local demand for labour or creating more jobs to reduce unemployment or over supply of labour. Analysis of the situation suggest that migrant Indian workers would be better off with minimum wage as such changes in the supply and demand will likely affect their job security and lead to massive unemployment. The Bahrani companies resistance and the announcement made by its Minister of Labour that local companies started seeking out cheap alternative source of labour are clear indications that such minimum wage will never work in favour of Indian workers. Another is the demand made by the Philippine government for Filipino maids in 2007 that eventually result to significant reduction in demand for such work category. 6 References ARNOLD, R. A. 2008. Macroeconomics, Cengage Learning. BAUMOL, W. & BLINDER, A. 2011. Microeconomics: Principles and Policy, Cengage Learning. BIZZELL, A., CLINTON, B. & PRENTICE, R. 2011. CPA Exam Review: Business Environment and Concepts 2011, U.S., Efficient Learning System Inc. CHIRAS, D. D. 1992. Lessons from Nature: Learning to Live Sustainably on the Earth, Island Press. DEEPASHREE, P. 2007. Principles Of Economics (For Delhi University B.Com Pass Course), New Delhi, McGraw-Hill Education (India) Pvt Limited. MANKIW, N. 2014. Principles of Economics, Cengage Learning. O'CONNOR, D. E. 2004. The Basics of Economics, Greenwood Press. PAHL, N. & RICHTER, A. 2013. Oil Price Developments - Drivers, Economic Consequences and Policy Responses, GRIN Verlag. PTI. 2011. Minimum wages hiked for Indian workers in UAE. The Economic Times. SURK, B. & ABBOT, S. 2008. India steps up pressure for minimum wage for its workers in the Gulf. New York Times.  Read More