The minimum wage conundrum

Increasing the minimum wage by more than the annual COLA adjustment might be seen as the panacea for social problems. I fear it is not.

Last Sunday’s papers practically all carried the news that a coalition of some 16 NGOs had joined forces to demand a rise in the minimum wage.

Basing their demands on a study made by veteran economist Karm Farrugia, they are demanding a 3.5% increase in the minimum wage every year for three years – the target being to increase the minimum wage by 10% – apart from the annual cost of living allowance (COLA).

They are also asking for a revision of the mechanism through which COLA is assessed annually so that it reflects the current circumstances better. Undoubtedly the economy is quite different from what it was when the COLA mechanism was established and agreed upon by the social partners and – to me – this request makes a lot of sense.

They have also requested that mechanisms regarding tax bands and other benefits are to be adjusted to reflect the new minimum wage. Again, if the minimum wage is increased, the possibility of people’s higher income leading to a loss of social benefits must also be considered.

This was a reaction to the stated official objective regarding the minimum wage as explained by the Prime Minister. He agrees that the minimum wage issue is a matter for discussion but he wants to consult everyone in an attempt at finding a compromise acceptable to all – rather than imposing a decision taken by the government. I read this as the government having already decided where the probable compromise lies but wanting his predetermined quasi-decision to be seen as a reflection of a compromise between the social partners. That is how Joseph Muscat works.

The PN simply declared that it agrees with the request for the increase in the minimum wage as expounded by the coalition of NGOs, apparently without thinking twice about it: an exercise in irresponsible political opportunism, if there ever was one.

The unions generally supported the request without going into much detail, either.

The other side of the social partners, the employer organisations, took some time to react, but react they did. They pointed out that the ‘lip service’ of both political parties on the issue without any consultation whatsoever with employer representatives had practically pre-empted the discussion process and seriously prejudiced the situation. They are, of course, correct as far as these comments are concerned.

Raising the minimum wage is an economic conundrum. It cuts both ways and there are good and bad effects whether one leaves it where it is or increase it as suggested.

Last September, finance minister Edward Scicluna was reported to have said that increasing the minimum wage would not necessarily solve the problem of poverty, arguing that many people who fall beneath the poverty line are in fact unemployed or pensioners. He added that: “For there to be a change in the system there need be markers indicating that it needs to change, for example an indication that this system has kept the minimum wage down when compared to other countries, or a rise in inflation.”

That is part of the story. The other part is the number of people registered as being on the minimum wage for taxation purposes but who agree with their employers to be given an ‘additional’ undeclared wage. This is not as rare as one might think. With practically full employment, luring employees by using this illegal ruse is becoming increasingly common. This is something that enforcement can hardly ferret out and is not so simple as going on a workplace and checking whether there are workmen who are not registered as working.

Others have an undeclared second job, usually part-time. I reckon that the number of persons officially living solely on the minimum wage is much less than statistics indicate. Moreover in a household where the two spouses are employed – both on a minimum wage – the ‘poverty’ issue does not arise.

Even so, the pecentage of people earning a minimum wage is rather small – mostly as a result of unions successfully negotiating collective agreemnents with employers.

An increase in the minumum wage would also provoke an increase in illegal employment, especially where foreign immigrants are concerned. These people are already being exploited by unscrupulous employers who pay them less than the minimum wage. An increase in the minmum wage continues to encourage the system.

The employer representatives have also warned of the ripple effect that the increase in the minimum wage could have. Employees recieving a wage that is above the minimum wage, say by 15%, will not be happy if the minimum wage is raised and the ratio between their pay and the minimum wage is upset. They will push for an equivalent increase in percentage terms to retain the existing relativity. The unions will not be able to resist these demands and will have to play the game, willy-nilly.

With that sort of effect, raising the minimum wage will probably only lead to an unnecessary increase in inflation and a loss in Malta’s competitiveness.

The employers’ associations, in fact, claim that a ‘professional report’ commissioned by MCESD sheds some doubt as to whether increasing the minimum wage is the ideal measure to combat poverty.

It seems that rather than taking rash decisions that will probably not solve any problems, the authorities should first launch a study to see who are the persons who cannot cope with the current cost of living. There is no doubt that these people exist and that steps should be taken to support them in a way that is much more effective – and less damaging economically – than an increase in the minimum wage across the board.

I reckon most of these are pensioners who are not affected in any way by an increase in the minimum wage. This year’s budget included measures to allievate the problems of pensioners. Whether these are enough or not, is also an issue to be considered.

Others who have problems of a social and health nature should undoubtedly be helped directly by the state.

Increasing the minimum wage by more than the annual COLA adjustment might be seen as the panacea for social problems. I fear it is not.

Such a decision warrants a more responsible attitude by all the social partners and by political parties.

Moreover it should be left outside the daily partisan political controversies that tend to blur reality.

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