The Politics of Wages in Mauritius
The Mauritian economy in 2024 is expected to ride on the wave of ever-rising consumerism and clientelism. This can cause inflation to become entrenched in the economy for years to come, and compromise economic stability and resilience
By Vinaye Ancharaz
2023 will end on a positive note for thousands of low-income earners, who will see their monthly salary jump from Rs 15,000 currently to Rs 18,500 as from January 2024. Middle- and high-income earners will receive a smaller consolation of Rs 2,000 as salary compensation. The new minimum wage and the announcement of the quantum of the 2024 salary compensation came within a week of each other and have been diversely commented. Many trade unionists were surprised by the generosity of the government. Although they had pushed for a ‘compensation salariale’ of Rs 1,500 to Rs 2,000, they did so to set the anchor high in the negotiations, as they usually do. Little did they expect the government to agree in toto to their demands.
Minimum Wage Singapore. Pic – Today Online
Other observers are more critical of the salary adjustments, arguing that the government is playing politics with wages, with potentially drastic economic consequences in the future. The private sector is worried about the impact of the salary increases on jobs and on the viability of smaller businesses. This article explains the economics of the minimum wage and salary compensation through a historical perspective, assesses the likely impacts of the recent salary hikes, and discusses their political-economy ramifications.
Evolution of the minimum wage
The national minimum wage (NMW) came into force in January 2018 following the report of the National Wage Consultative Council (NWCC), which was established by a 2016 Act to make recommendations thereupon. Initially, the NMW was set at Rs 9,000: Employers in non-export-oriented enterprises (non-EOE) would pay Rs 8500 while the EOE sector would pay Rs 8,140, with the government topping up the employers’ shares by Rs 500 and Rs 860, respectively. Over the years, the NMW has been adjusted through annual cost-of-living allowances (or ‘compensation salariale’). On 1 January 2023, it stood at Rs 12,075: Rs 11,575 payable by employers in the non-EOE sector and Rs 10,875 payable by EOEs, with the balance chipped in by the government.
The 2023-24 Budget raised the government’s share so that employees across the board would be guaranteed a minimum monthly income of Rs 15,000. That meant that the government would effectively pay Rs 3,425 to employees in the non-EOE sector and Rs 4,125 to employees in the EOE sector, of which Rs 2,000 would be out of the CSG. The latest announcement last week does away with the differentiation between the EOE and non-EOE sectors, imposing the same NMW of Rs 15,000 across all sectors, which, with the CSG allowance of Rs 2,000 and the ‘compensation salariale’ of Rs 1,500 takes the ‘revenu minimum guaranti’ to Rs 18,500.
The economics of the minimum wage
Minimum wages are set above the market wage to ensure a decent income – or living wage – to workers. There are accounts of some categories of workers being paid as low as Rs 1,500 per month before the NMW kicked in in January 2018. Basic economic theory predicts that the legislation of a minimum wage will initially disrupt the labour market and cause unemployment in the short term. Consider the diagram below. If we view labour as a commodity (or a service), then the wage rate is the price of labour, and we can explain the determination of this price like most other prices, that is, in terms of the market forces of demand and supply.
The demand for labour comes from employers and is a derived demand. That is, it is ‘derived’ from the demand for the final good or service that the firm produces. Since firms are profit-seeking, they will want to hire more workers when it is cheaper to do so, that is, when the wage rate is low. The demand-for-labour curve is therefore downward-sloping. The supply of labour comes from the working population. Each unemployed person has a ‘reservation wage’ below which he or she will not be willing to take up a job. But as wages rise past the reservation wage, the jobless may find it economically attractive to join the labour market, and the labour supply will increase. The labour supply curve is thus upward-sloping: as the wage rate rises, more people will be willing to work.
In the absence of government intervention, the labour market will clear, that is, labour demand will equal labour supply, at wage rate W0. Note that this point is a full-employment equilibrium: at wage rate W0, every person who sought a job is gainfully employed.
Now, suppose the government deems that the wage rate W0 is too low, and legislates for a minimum wage of Wm, which obviously must be above W0 for it to be effective. Precisely because the minimum wage is higher than the market-clearing wage, firms wish to employ fewer workers, Ld. Conversely, the minimum wage attracts more of the unemployed, and labour supply rises to Ls. In the final analysis, only Ld workers will be employed, and unemployment will amount to Ls-Ld. This consists of Ls-L0 jobseekers who are unable to find a job and L0-Ldworkers who were previously working but are now jobless.
The minimum wage has thus moved the economy from full-employment equilibrium to a situation of unemployment. Those who lost their job after many years working in a specific sector may not have developed any skills that could prepare them for an alternative job. These people will find it hard to get re-employed in emerging sectors of the economy. Many, especially women past their 50s, may choose to drop out of the labour force, opting for the role of housewife and/or grandmother. This is precisely what happened between 2019 and 2020, when the Mauritian labour force shrank by some 21,000 workers as several companies in the textile sector closed shop. The pandemic further squeezed the labour force by more than 37,000 workers, bringing the local labour force to a low 532,800.
‘Compensation salariale’
Tripartite negotiations for determining the quantum of the salary compensation that would come into effect the following year are a long-established practice. It is meant to compensate workers for the decline in their real incomes (that is, the purchasing power of their money wages) due to inflation in the current year. For practical reasons, however, workers may not receive full compensation for the loss of purchasing power, and so, it is misleading to call such salary adjustment a cost-of-living allowance. There are several reasons why.
First, the inflation rate used for calculating the salary compensation is usually understated. For example, the ‘compensation salariale’ for the year 2021 (payable in 2022) was based on an inflation rate of 3.5%. The actual inflation rate turned out to be 4.0%. Similarly, the salary compensation for 2022 was calculated on a projected inflation rate of 10.7%, lower than the actual rate of 11.2%. For this year, an inflation rate of 7.1% was proposed, even though the final adjustment was calculated as 10% of salaries up to Rs 20,000, and a flat Rs 2,000 thereafter. The projected inflation rate of 7.1% was, in any case, a blatant underestimate amid allegations of statistical manipulation by several local observers as well as by the IMF. The IMF itself forecasts inflation in 2023 to reach 7.8%, based on data provided by Statistics Mauritius. The feeling on the ground is that the cost of living in 2023 has increased well beyond the 7.1% suggested by the inflation rate.
Against this background, the 10% hike seems fair, but it does not adequately compensate middle-income earners for their loss of purchasing power. While the latest estimates by Statistics Mauritius put the median salary in the range of Rs 16,000 – Rs 18,000, it is clear that this figure is invalid in the face of the revised NMW (including salary adjustments) of Rs 18,500. By some international estimates, the median salary in Mauritius is currently in the region of Rs 40,000, which sounds more reasonable. At this rate, the median income earner received a measly 5% ‘cost-of-living allowance’, far inadequate to even compensate for the projected inflation rate of 7.1%.
Second, the salary compensation is paid ex post one year later, that is, after workers have suffered the impact of inflation. This means that a worker getting a salary adjustment of Rs 1,500 actually received only Rs 1,350 in real terms if the inflation rate for the year was 10%. Ideally, salaries should be adjusted in real time based on monthly or quarterly inflation rates. Such a system is admittedly complex to administer. For all intents and purposes, therefore, workers will never be fully compensated for inflation.
Third, salaries make up a significant share of businesses’ operating costs. So, when salaries are adjusted for inflation, firms will face higher costs, part of which they will be able to pass on to consumers through higher prices. (However, not all firms will be able to raise the prices at which they sell: think of a gas (‘filling’) station, for example, or an export-oriented enterprise.) Thus, it is inevitable that prices rise further – a phenomenon economists call the ‘wage-price spiral’. Another reason why the payment of large salary compensations fuels more inflation is that they cause liquidity in the economy to surge, leading to a situation of ‘too much money chasing too few goods’.
The prevailing festive mood, doped by end-of-year bonuses and expectations of higher wages in January 2024, is concealing the harsh reality of entrenched inflation. But the new year will come not only with fatter pay checks, but also with swelling bills as inflation becomes ubiquitous. The IMF forecasts inflation in 2024 to drop to 6.5%, but this only means that prices will keep rising from a high base, though at a slower rate. Relief from the rising cost of living is not in sight in the short term.
Impacts and implications
The labour market is yet to fully adjust to the NMW, which has continuously increased since its introduction in 2018. In fact, the NMW has more than doubled in the past five years – something that takes decades in other countries. For example, Singapore continues to shun the idea of a minimum wage till date, afraid of its damagingimpacts on the country’s competitiveness. In the UK, the national living wage for those aged over 25 has increased from £7.50 per hour to £9.50 per hour between March 2018 and March 2023, a 27% increase over a 5-year period. This comparative perspective prompts one to ask why the NMW in Mauritius has increased so much faster. One view is that the government is playing politics with the minimum wage, just as with retirement pensions. If this is true, the long-term economic impacts could be drastic since there was little justification for the latest hike.
An alternative view is that the level at which the NMW was set in 2018 was too low and meant to be raised in the future. This is why the NWCC was mandated to review the NMW every five years, subsequently reduced to three years by the Finance Act 2023. In this case, the government may be doing little else than implementing the NWCC’s recommendations, and the economic impact of the new NMW, even if negative in the short term, may fade out as economic operators adjust to the higher minimum wage over time.
A third possible explanation is that the NMW had become meaningless as its real value has been eroded by persistently high inflation since 2021. If that is true, the increase in the NMW, notwithstanding the additional salary compensation, may be more of an adjustment for the loss of purchasing power. The impact of the new NMW on businesses, in this scenario, will be small since inflation benefits most enterprises, except the weakest ones, which will require some form of government support to survive. In practice, some aspects of all three views may be present in the recent hike in the NMW.
Impact on economic growth
The IMF projects economic growth in 2024 to drop to 3.8%, closer to pre-Covid levels. But this forecast does not take into account the recent salary adjustments. Odd as it may sound, the new NMW and the salary compensations may have a positive effect on economic growth next year. This is because growth in Mauritius in recent years has been driven more by consumption than by investment, and higher salaries will encourage people to spend more. Ultimately, therefore, most, if not all,of the increase in salaries that businessesand the government paid out to their employees will return to them in the form of higher sales revenues and higher VAT collections, respectively. Indeed, this prospect could have motivated the government’s ‘generous’ offer of both the new NMW and the salary adjustments.
Financing implications
Business Mauritius has estimated the total cost of the salary increases at Rs 12 billion. The cost to the government, including the Rs 2,000 paid out of the CSG to all employees, could reach a similar figure. Many observers have queried how the private sector and the government would pay these bills. Micro- and small enterprises may not have the capacity to pay, and their long-term survival may very well depend on government assistance. However, many large companies have recently posted billions of rupees in profit; they should have no problem paying the salary increases.
The government has remained evasive on its financing strategy, but it is known that it can rely on the increase in tax revenues in a buoyant economy and, to some extent, on CSG collections, which will automatically increase as salaries rise. Moreover, as the increase in salaries causes inflation to rise further, the government will collect additional revenue through the inflation tax (VAT paid on a good or a service rises as inflation causes its price to swell). And finally, both the business sector and the government will benefit from the increased consumer spending triggered by higher salaries.
The aggregate wage bill will increase substantially if salary structures are eventually revised to maintain relativity. Additionally, for the government, the financing situation may get complicated if it were to grant the remaining Rs 2,500 increase in the Basic Retirement Pension (BRP) early next year. The increase in the NWM sets the stage for the final increase in the BRP to Rs 13,500 – if not beyond. This may cost the government an additional Rs 10 billion annually. Finally, the government is likely to rev up its spending machinery in an election year, with massive recruitment in the public sector and a slew of populist measures in the 2024-25 Budget.
All this suggests that the Mauritian economy in 2024 is expected to ride on the wave of ever-rising consumerism and clientelism. This can cause inflation to become entrenched in the economy for years to come, and compromise economic stability and resilience.
“The national minimum wage has more than doubled in the past five years – something that takes decades in other countries. For example, Singapore continues to shun the idea of a minimum wage till date, afraid of its damaging impacts on the country’s competitiveness. In the UK, the national living wage for those aged over 25 has increased from £7.50 per hour to £9.50 per hour between March 2018 and March 2023, a 27% increase over a 5-year period. This comparative perspective prompts one to ask why the NMW in Mauritius has increased so much faster. One view is that the government is playing politics with the minimum wage, just as with retirement pensions. If this is true, the long-term economic impacts could be drastic…”
* * *
“The minimum wage has moved the economy from full-employment equilibrium to a situation of unemployment. Those who lost their job after many years working in a specific sector may not have developed any skills that could prepare them for an alternative job. Many, especially women past their 50s, may choose to drop out of the labour force, opting for the role of housewife and/or grandmother. This is precisely what happened between 2019 and 2020, when the Mauritian labour force shrank by some 21,000 workers as several companies in the textile sector closed shop. The pandemic further squeezed the labour force by more than 37,000 workers…”
* * *
“Odd as it may sound, the new NMW and the salary compensations may have a positive effect on economic growth next year. This is because growth in Mauritius in recent years has been driven more by consumption than by investment, and higher salaries will encourage people to spend more. Ultimately, therefore, most, if not all, of the increase in salaries that businesses and the government paid out to their employees will return to them in the form of higher sales revenues and higher VAT collections, respectively. Indeed, this prospect could have motivated the government’s ‘generous’ offer of both the new NMW and the salary adjustments…”
* * *
“The government has remained evasive on its financing strategy (for salary increases), but it is known that it can rely on the increase in tax revenues in a buoyant economy and, to some extent, on CSG collections, which will automatically increase as salaries rise. Moreover, as the increase in salaries causes inflation to rise further, the government will collect additional revenue through the inflation tax (VAT paid on a good or a service rises as inflation causes its price to swell). And finally, both the business sector and the government will benefit from the increased consumer spending triggered by higher salaries…”
* * *
“The salary compensation for 2022 was calculated on a projected inflation rate of 10.7%, lower than the actual rate of 11.2%. For this year, an inflation rate of 7.1% was proposed, even though the final adjustment was calculated as 10% of salaries up to Rs 20,000, and a flat Rs 2,000 thereafter. The projected inflation rate of 7.1% was, in any case, a blatant underestimate amid allegations of statistical manipulation by several local observers as well as by the IMF. The IMF itself forecasts inflation in 2023 to reach 7.8%, based on data provided by Statistics Mauritius. The feeling on the ground is that the cost of living in 2023 has increased well beyond the 7.1% suggested by the inflation rate…”
Mauritius Times ePaper Friday 15 December 2023
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