The Thorny Issue of ‘Minimum Wage’

We had learnt to live for a better sharing and fairer society. We can move in this direction again without hurting the poor – or the economy even

There is a whole history of Mauritius’ political struggle around demands for a decent pay to workers. Trade unions and workers’ representatives have for long been asking successive governments to legislate a ‘minimum wage’ for workers, the present government not excepted. Remuneration orders have been published from time to time to adjust workers’ pay to match the cost of living and individual sectors’ ability to pay. Nevertheless, the issue of a ‘minimum wage’ has kept surfacing up.

Two sides of the story

One would ask as to why this matter has remained unsorted over such a long period of time. As usual, there are two sides to the debate.

On the workers’ side, the argument has been that price increases have kept eroding nominal adjustments in wages over time so that about a hundred thousand workers – and, hence, their families – have to cope today with wages insufficient for a decent life. In other words, the floor level of wages for such underpaid workers is too little to provide even for the bare necessities. In such a context, a ‘reasonable’ minimum wage would, in the view of trade unions, guarantee that the workers and their families do not remain or fall into abject poverty. Certain trade unions have therefore been asking for an across-the-board ‘minimum wage’ in the region of Rs 11,000 per month.

On the side of employers, the argument is that a prescribed generalized ‘minimum wage’ would make certain sectors of activity economically unviable. In other words, once a ‘minimum wage’ is prescribed, it would tend to eliminate enterprises incapable of sustaining it and, with it, the workers. There is a risk that the economy – and the level of employment — would shrink as enterprises unable to sustain themselves at the prescribed minimum wage disappear. That could include enterprises competing for exports of goods and services on external markets.

A middle-of-the-road path

The argument is valid, from both points of view. One therefore needs to reconcile differences and come to a proposal impacting positively the standard of living of workers and their families at the lower rungs of the economic ladder, while not putting at risk the economic viability of vulnerable enterprises.

In Mauritius today, it should be evident that a household, having a single member in full time employment, would not survive decently on a monthly salary of, say, Rs 2000. Certain unskilled jobs are actually paid for at that level.

Once an inventory of such precarious positions is taken and adjustment costs evaluated, the employer should be encouraged to lift the level to a monthly workable level in a given timeframe. A signal may have been sent by the government recently when it decided that the salary of cleaners in schools should go up to Rs 8,500 a month. Were such an action to result in the eventual demise of some enterprises, government’s social and economic policies should then kick in to keep alive both the employer and the employees.

That would include both targeted complementary social benefits to concerned workers and contribution to upgrade the efficiency and market outreach of the concerned enterprises. It requires paying attention to detail. Several micro-finance schemes in places like Bangladesh have been made viable by paying attention to their continued sustainability in this manner.

Outside of this category of enterprises which are exposed to continuing economic vulnerability, there are others higher up in the league. These target an ever-increasing level of profits from year to year. There is nothing against enterprises being reasonably profitable, especially when a good part of profits earned are retained in the business to grow the enterprise or to make it more resilient to possible unforeseen economic distress.

For example, the amount of interest income commercial banks in Mauritius earned collectively on advances granted to customers in 2012-13, 2013-14 and 2014-15 amounted to Rs 26.4 billion, Rs 30.3 billion and Rs28.1 billion, respectively, whereas the interest they paid to depositors on much larger deposits than the advances granted amounted to much less – Rs 11.6 billion, Rs 12.3 billion and Rs 10.4 billion in these years. Similarly, non-bank deposit taking institutions paid about only half the amount as interest to depositors as what they charged borrowers in 2012, 2013 and 2014. Such enterprises can afford to pay a legally prescribed ‘minimum wage’ for their employees so long they remain profitable without risking their economic survival.

Persistent high profitability of specific enterprises has led to the pay of top executives in such enterprises having become indexed somehow with the earnings and share price of the enterprises, especially so in the advanced economies. This has widened the gap between the top earners and those at the bottom, the latter being oftentimes made to compare their earnings with the pay those in comparable grades are obtaining in the least remunerated enterprises of the economy. This system helps put pressure on the pay of lower-scale workers across the board, to the effect that the workers are indirectly advised to stick ‘within tolerable limits’ at the risk of loss of jobs. Unfair.

The way forward is to ensure that workers go back home with a reasonable pay to enjoy decent living standards but also something beyond it to nurture aspirations in them and their families to be able to save a bit so as to raise themselves above the threshold of vulnerability in future. Past practices of keeping the pay as low as possible to get “obeisance” from workers and “suppress” them – as it was the case in feudal societies — should gradually be done away with.

Countries which have progressed economically have raised workers from the bottom to feel much more confident about themselves. More generous pay has made certain countries successfully draw enormous talent from the ranks of those who were initially considered not fit to climb up the ladder. A good pay is always an incentive for the worker to do better, to go beyond what is considered the ‘minimum wage’. One should therefore target not only the ‘minimum wage’ as a threshold of fairness in employment but see in a fairer distribution of enterprises’ earnings across the board a means to better future economic potential.

Income and wealth disparities

In his path breaking research, Thomas Picketty came to the conclusion that the long-standing trend in developed countries for the rate of return on capital to be higher than the rate of economic growth has depressed economic growth by putting too much money in fewer and fewer hands over time. He forecasts that, by accentuating income and wealth inequalities in society, this process will cause wealth inequality to increase further in future. A similar trend of accentuation of income and wealth inequality prevails in developing countries as well. It needs to be dealt with through appropriate public policies before it is too late.

Oxfam, an international charity, has been making the same kind of statement but by placing emphasis on the amount of poverty generated worldwide by the system. In its latest report released on Sunday last, the charity claimed that one out of nine people do not have enough to eat every day and that a billion out of the world’s seven billion people live on less than $1.25 a day while 62 super rich individuals own more than 3.5 billion people on earth. It needed 388 super rich to make that number only five years ago. One of Oxfam’s several recommendations is to institute a minimum wage policy to temper the extremes of poverty to which the long-standing wealth and income inequalities are driving people across the world.

What all this means in our context is the need to adopt a policy of redistribution of wealth and incomes without at the same time introducing destabilising policies such as exchange rate erosion, indirect taxes and ever-rising prices which indirectly take away from the poor and middle class temporary gains they make from pay adjustment, all this to the benefit of only those who are getting excessively richer. Politicians and technicians in the past knew how to strike a fair balance so that, without prescribing a minimum wage, those at the lower levels could cultivate aspirations for a better life.

Current demands for a minimum wage are grounded in the fact that, oblivious to the harsh living conditions of so many at the bottom, policy has played in favour of those who already have too much and want to “secure” their future and those of their succeeding generations even more firmly. This has laid waste many a life of workers who have been left dangling behind in ever greater poverty. We had learnt to live for a better sharing and fairer society. We can move in this direction again without hurting the poor – or the economy even. Only greed for an apparently insatiable appetite for ever more wealth and power will need to be reined in a bit further for a more salubrious society.

* Published in print edition on 22 January 2016