The Minimum Wage and Its Impact

Economic Outlook

‘The situation is really alarming in the textile sector; it has not been able to absorb the additional cost of the minimum wage through new orders, higher prices of their products or increases in labour productivity’

The National Minimum Wage was set at Rs 8,000 a month, effective from year ending 31st December 2017 and 8,500 as from year ending December 2018. From the preliminary observations of the National Minimum Wage Council, one can easily see that a more detailed analysis is needed to isolate the impact of the minimum wage on the economy from the customary or annual trend. The weights of the 111,300 full-time workers and 9300 part-time workers in the different sectors of the economy, impacted by the minimum wage, are not that significant to have an effect on either the wage index or the average earnings.

The wage index for all sectors increased by 4.3% in Q3 2018 compared to the corresponding quarter of the previous year. As for Q3 2017 over the corresponding quarter in 2016, the index grew by the same percentage i.e. 4.3%.

It is interesting to also see the evolution of earnings over the period 2017 to 2018. The term ‘Earnings’ covers all payments in cash made to employees in connection with work done. Amounts reported include wages, overtime, productivity bonuses, commissions, travelling allowances, attendance bonuses, housing and rent allowances and other regular cash payments before making any deductions such as taxes, insurance and pension contributions paid by the employees. They exclude pension payments, family allowances and other similar special benefits paid by the employers.

The level of average earnings is influenced mainly by increases in basic salaries and wages. However, fluctuations may also occur because a large intake of employees at the lower end of the salary structure of an establishment or a substantial increase in their wages has the effect of lowering the average earnings or by the changes in overtime, regular bonuses and commissions.

The difference in the growth rates of average monthly earnings in large establishments in 2018 and 2017 was also quite marginal. In 2017 it increased by 3.7% and in 2018 it was 4.3% accounted largely by the highest increases registered in ‘Financial and Insurance Activities’ (9.9%), which has more weight. Thus, though an increase in the growth of average earnings was observed in 2018, the growth may be attributable to the larger increase in average earnings in growing sectors and it is not possible to deduct the impact of the minimum wage.

Similarly, the observations that with the introduction of the minimum wage, the number of permanent jobs in the private sector as well as in the tertiary sectors show an increase may not be exact. The figures of ‘Labour force, Employment and Unemployment – Third quarter 2018’ show that employment in both large and small establishments, from third quarter 2017 to third quarter 2018, decreased by 5600 and the tertiary sector also registered a decrease of 7000 workers.

As for the impact of the increase in minimum wage on consumption, it is equally difficult to dissect the effects from the general trend of a yearly increase of around of 0.1 to 0.2 percentage points, as can be seen from Table 1.

Table 1 – Expenditure on GDP at Market Prices – Growth Rates, 2015 – 2018

 (% over previous year) 2015 2016 2017 2018
 Final consumption expenditure +2.9 +2.9 +2.9 +3.4
 Households +2.9 +3.0 +3.2 +3.4

However, these increases in consumption did contribute to the hike in headline inflation rate excluding ‘Alcoholic beverages and tobacco’. It went up from 0.4% to 4.0%, 1.2% to 3.5 %, 2.0% to 3.1%, 2.5 % to 3.1 % respectively for corresponding periods of 2017 and 2018 for the months of March, June, September and December.

The real adverse impact of the minimum wage was on the textile and wearing apparel sub-sectors of the manufacturing sector. The average wage per hour was quite low – between Rs 35 to Rs 51 per hour in 2017 – and with the introduction of minimum wage, the average monthly earnings in both subsectors increased substantially in 2018 from negligible yearly growths of 0.2 – 1% to 4.2 – 4.4%. Over the period September 2017 to September 2018, 8 enterprises engaged in the manufacture of “Wearing apparel” and one in the “Textile yarn and fabrics” sub-sector closed down with job losses of 2717 and 145 respectively. The impact could have been worse if some of the enterprises did not opt for orders with higher margins, where possible and for the abolition of overtime The CMT announcement that it is planning to relocate abroad has had the effect of a mini-tsunami on the textile sector. Emmanuel Tsang Mang Kin, CEO of Tamak Textile Ltd comments that “I’m not surprised! It’s hard to survive as a textile operator”. Above all, he continues, the cost of labour is constantly rising and operators are facing intense competition globally.

Ajay Beedasee, spokesperson of the Textile and Apparel Manufacturers Association, is alerting us to the fact that the situation is really alarming in the textile sector; it has not been able to absorb the additional cost of the minimum wage through new orders, higher prices of their products or increases in labour productivity. The cost of labour is too expensive, he says. He fears that other factories are relocating as envisaged by the CMT. “If a big box like the CMT (Compagnie Mauricienne de Textile Ltée) goes away because it cannot afford the costs, imagine what the small and medium businesses in the industry are going through. By the way, just last year, I know six to seven factories that have closed. Other SMEs may put the key under the mat this year. In addition, I am afraid that other factories will opt for relocation.” he adds. He expects government to come forward with a Marshall plan for the sector, as was done for the sugar sector when it was a question of its survival.

“The government should come forward with solutions because the list of companies in difficulty continues to grow,” advises on his part Emmanuel Tsang Mang Kin.The ball is now in the Government’s court, and it has to assume its responsibility and react promptly and decisively. The country is watching impatiently for its next move and is least impressed by the apparent favourable impact of the minimum wage on women’s participation in the labour force.

* Published in print edition on 15 February 2019

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