Economist: Raise minimum wage

ECONOMIST Dr Vaalmikki Arjoon, lecturer in finance at the University of the West Indies, St Augustine, on Friday urged a hike in the minimum wage but said it must be carefully done to balance several competing considerations. He gave Newsday his written response to the Prime Minister's promise to consider the minimum wage level in addressing a post-Cabinet briefing on Thursday at the Diplomatic Centre, St Ann's, ahead of the national budget expected in early October.

"An increase to the minimum wage is warranted especially given the dramatic increase in the cost of living in the last few years," Arjoon declared. He said in the last five years, prices have risen about 15 per cent, but with food prices up by 27 per cent.

Arjoon said any minimum wage hike aims to boost the purchasing power of low-earners and their overall quality of life, and fight poverty.

It is also intended to stimulate the private sector by additional spending from the greater disposable income of people in the lower-income bracket.

"However, these benefits largely depend on the extent of the wage increase.

"If it is too high, especially one that businesses cannot afford, it can create more economic difficulties that will outweigh the potential advantages of the wage increase."

He said any wage increase must consider the rise in the cost of living and any rise in overall productivity.

"If wages are increased by a greater proportion than productivity, we run a serious risk of increased inflationary pressure.

"Therefore, when deciding the minimum wage increase, a balance must be struck when considering the increase in the cost of living and productivity gains."

Arjoon expected more inflationary pressure, as a higher minimum wage raises business costs which will likely be passed on to the consumer as higher prices. "Naturally, inflation erodes any improvement to the purchasing power from the wage hike."

He warned that a minimum wage hike – especially if too high – could worsen business costs and therefore affect employment.

"Some companies especially smaller ones may opt to hire workers on a temporary basis instead of giving them a permanent position so that they can better manage their overall wage bill. There can also be possible job losses, as some low-skilled positions could be made redundant."

The employer might transfer the duties of that post to someone else without raising their pay, reducing job-opportunities for other people with limited skills.

"Moreover, a substantial increase in the minimum wage can lower profit margins for small businesses."

Arjoon said if the increase is too high, employers might under-report hours worked, so as to leave the total wage-bill unchanged. He also feared some companies might not report employment at all, entirely evading the minimum wage law, a scenario more likely for unregistered businesses and those in the shadow economy.

Further, he said some low-skilled workers without jobs in the formal sector due to a minimum wage hike may seek jobs in the shadow economy at a lower salary.

This would violate the minimum wage law and promote the shadow economy, Arjoon warned.

"To this end, increasing the minimum wage is warranted and of utmost importance given the recent hike in the cost of living.

"This increase must improve the welfare of workers at the lower end of the ladder and reduce inequality, but at the same time the increase should not be too large to create inflationary pressures, unethical employment practices and growth of the shadow economy."