Saturday, January 21, 2012

An Annual Automatic Minimum Wage Adjustment: Misguided Policy

The adage “Be careful of what you wish for, it might come true” highlights the need to be very cautious and deliberate in choosing an end as well as a means. For who wants to attain a cherished goal if that implies adopting wrong and illiberal policies that are antithesis of the goal sought. Even Machiavellianism would not advocate a means that could wreak more havoc than the benefits bestowed. Such a circumstance is similar to the empty and hollow Pyrrhic victory where the king of Epirus defeated the Roman army in battle but said: "If we are victorious in one more battle with the Romans, we shall be utterly ruined."

Unfortunately for organized Lebanese labour, the latest raise in the minimum wage is being celebrated as a victory, which it is, had it not been attached to a provision of annual automatic increases tied to the rate of inflation. This automatic rise in the level of minimum wages poses a great danger to transform this accomplishment into a defeat for labour.

Indexing of wages, even minimum wages, is problematic for at least two reasons. (1) What is the index that is to be applied for the purpose of conducting such adjustments and does the country posses such a reliable objective index?   One issue to be clarified at the outset,is that an adjustment by a  consumer price index , CPI, does not make all its recipients whole as it is popularly alleged. Given two consumers Ali already owns a house while Elias does not and assuming that the largest component in the CPI is that of housing then a 10% increase in pay might help Elias not fall behind but it will be pure gain for Ali who has already purchased his dream house. As this very simple example illustrates there are a number of indexes that could be constructed and each could lead to a different result. That is why it is important to agree from the start on a specific index and who is going to be in charge of collecting the data for that particular measure. This is not a simple matter since Lebanon does not have the detailed studies to compose the baskets that are to constitute such measures. I still have to see the detailed composition of a Lebanese CPI. Furthermore the cost of living in Lebanon, as small as it is, shows considerable variation between regions and thus regional indexes are in order. But what ought to be of a great concern is the feature of automatic guaranteed rise in minimum wages. That automaticity could become the most damaging to the labourers at the bottom of the pyramid. If it so happens that the wages of  unskilled labour increases without a commensurate increase in its productivity then that would only lead to more unemployment among the low skilled and would exasperate the levels of poverty.

A constant level of minimum wages in real terms is an honourable goal worthy of achievement. That is not what is being questioned. It is the efficacy of the method used in order to achieve that noble goal. A cost of living adjustment , even if a reliable and fair index is available, must not be automatic since that introduces rigidity into the labour markets and because it assumes that all inflations are alike which ,we all know ,is not the case.  Economies, such as many of the southern European ones, are at times afflicted by negative macroeconomic data that demands a major effort to control wages  in order to regain competitiveness. Under such dire economic circumstances labour will be committing suicide if it demands a higher nominal wage when wage restraint should be the regimen. The phenomenon of cost push inflation or what has been called stagflation is no longer an aberration but is instead a possibility to contend with. Another equally troubling scenario would be that of an imported  inflationary environment combined with relative stagnation in the productivity of the economy where the general wage level is  stagnant. Under such conditions an automatic increase in the minimum wage would become a reward for being unskilled.

A society is best judged by how equitable is its distribution of income, once the skill level is accounted for, and how well it treats its underprivileged and poor.  These goals are to be promoted through a progressive income tax structure, greater expenditures on education and targeted growth policy. A rigid automatic increase in the minimum wage is not a substitute for the above. If this proposal is adopted as is then I predict that it will hurt those that it claims to be helping but the degree of the pain will not become clear until 5-7 years after its adoption.

May I humbly suggest a periodic thorough review , once every five years or so, of the status of the minimum wages vis a vis the rest of the economy instead of the straight jacket of an automatic annual increase.

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