A Balanced and Evidence-based Approach to Minimum Wage Adjustments
As the conversation on a minimum-wage adjustment develops, it is good that all stakeholders agree—even the business community, as articulated in a recent interview with the Belize Chamber of Commerce and Industry (BCCI)'s President—that an uprate to the minimum wage is necessary.
Additionally, most stakeholders appear to agree that the best way to approach it is by having a minimum-wage-adjustment formula serving as the guide post. That is also a good thing.
The agreement in those two BROAD areas is a great start. However, there are a few technical things that must be highlighted.
BALANCED AND EVIDENCED-BASED
Let’s start here. The likes of the International Labour Organization (ILO) have advised that a Balanced and Evidence-based Approach (BEA) be employed when making uprates. What's a BEA? Simply put (and is consistent with the ILO's Minimum Wage Fixing Convention, 1970) is for policymakers to consider the needs of workers, the conditions of the economy, and the ability of enterprises to actually afford the increase.
Candidly speaking, policy always has to consider, inter alia, the ability of the regulated entities to comply with the change. This is why, no one—with a straight face—has uttered that the minimum wage should increase to something like $20 per hour.
More precisely, the ILO, in its minimum wage policy guide, puts it like this:
"A balanced approach is one that takes into account, on the one hand, the needs of workers and their families and, on the other, economic factors.
"Such an approach combines both social and economic factors in order to find a level that benefits workers and society WITHOUT PROMPTING NEGATIVE EFFECTS. A balanced approach is necessary because a minimum wage is a redistributive tool that has both BENEFITS and COSTS.
"If set too low, minimum wages will have little effect in protecting workers and their families against unduly low pay or poverty. IF SET TOO HIGH, minimum wages will be poorly complied with and/or have ADVERSE EMPLOYMENT EFFECTS.”
CHANNELS OF ADJUSTMENT
Before proceeding, there is value in discussing these “effects” alluded to by the ILO and others, as there is a need to expand the paradigm on this subject.
Frankly, the economic literature on MW changes has long since moved towards recognizing that there are many likely channels of adjustment (CoAs) associated with an MW change.
As pointed out by economists such as John Schmitt (2013) and Hirsh et. al (2015) there are POTENTIALLY multiple CoAs. Schmitt, for his part, identified at least ELEVEN that COULD follow an MW increase. These are: (1) Reduction in hours worked, (2) Reduction in non-wage benefits (bonus, health insurance, pension contributions), (3) Reductions in training, (4) Changes in employment composition, (5) Higher prices, (6) Improvements in efficiency, (7) Efficiency wage response from workers, (8 ) Wage compression (slower increases for non-MW workers),
(9) Reduction in profits, (10) Increase in (consumer) demand, and (11) Reduced turnover.
Now, please notice the use of the words “potential” and “could.” This area of economics is still evolving and many times the results are inconclusive across disparate research works. Nevertheless, there is value in keeping these adjustment channels in mind, as we discuss adjustments to the minimum wage.
Additionally, it is clear that not all of those eleven CoAs are "bad." Now! Which of those 11 CoAs will dominate in Belize? Well! That should be the subject of our own idiosyncratic research. Remember. Each economy is like fingerprints: Unique, and thus requires unique, research-based attention.
The CoAs and the need for a balanced approach are, among other things, the key motivators for a formula-based approach to be utilized. Countries such as Costa Rica employ a formula that looks at the consumer price index (CPI)’s changes alongside the state of the economy, while still preserving the indispensable role of the social partners.
In other jurisdictions, other variables such as the poverty line, productivity measures, and more have been incorporated into their formula in an effort to balance the needs on both sides of the labour market.
Most importantly, the formula-based approach is more predictable, frequent, and structured.
Hypothetically speaking, if since 2012, a formula had been utilized to guide changes on either an annual (or biennial) basis, and those changes were incremental, it is likely that the conversation TODAY would NOT be about jumping from $3.30 to $5.00, which is a significant 51% increase that already struggling employers would have to find! Considering the inflationary times, that pill would be a lot for micro, small, and medium-sized enterprises (MSMEs) to swallow virtually overnight.
If this process had benefited from more frequent updates (annually or biennially), then change might have been well below a 10% uprate (as opposed to more than 50%). Too sudden of a shift may summon the more negative members of that eleven-point list of CoAs mentioned above.
For this reason, the ILO's advice on medium-term MW strategy is also instructive:
"Many countries have discovered that a GAP exists between the legitimate needs of workers and their families and what the ECONOMY IS CAPABLE OF PAYING IN TERMS OF MINIMUM WAGES. It will NOT be possible to eliminate this gap in a SINGLE MINIMUM WAGE ADJUSTMENT, at least NOT WITHOUT ADVERSE ECONOMIC EFFECTS."
"This suggests that there should be a medium- to long-term target for this policy – that is, closing this gap in SUCCESSIVE, GRADUAL adjustments."--ILO (2016, p. 52, at Link 1).
In order for there to be a “gap” there has to be two sides: In this case, workers and employers. Often, the conversation on minimum wage ventures into decreeing that the needs of the workers are at least $5.00, $10.00 or more. And, from a cost of living standpoint, that may very well be true!
However, the other half of that GAP is whether the average micro, small, and medium-sized enterprises (MSME) can currently afford to fill those gaps practically overnight.
In short, then, the balanced and evidence-based approach is not an attempt to relegate or ignore the financial needs of workers in any economy. Instead, it rightfully recognizes that there are literally two sides of the equation, and the private sector’s ability to pay cannot be ignored.
ROLE OF SOCIAL PROTECTION PROGRAMS
Of course, the retort can easily be the old adage: “While the grass grows the horse starves.” Can a responsible set of policymakers truly implement a judicious set of incremental increases to the minimum wage, while believing (or maybe even confirming) that the needs of workers are much higher?
The short answer is “no.” But then, at this point, it becomes a debate on responsibility-sharing. While, yes, the workers should benefit more from their work via higher wages, in the interim this is where governments must step in with social protection and assistance programs that, among other things, help to fill the remaining “gap.” The minimum wage, therefore, cannot be the chief and only poverty-fighting strategy of policymakers; there is an urgent need for other social protection programs to be upgraded or introduced, and these include “graduation programs,” rent assistance initiatives, and more.
Graduation programs are worthy of some special attention. These types of social protection programs tend to include cash transfers to individuals or households (e.g. the individual may receive a stipend). Simultaneously, the beneficiaries are (mandatorily) enrolled in skills training programs, and thereafter are matched with productive employment opportunities. Fundamentally, at the end of a prescribed period of time, the participant should be able to stand on his or her own two feet either as a productive employee or an entrepreneur, and may very well be earning more than the legislated minimum wage.
To conclude, then, we must not lose sight of the real problem that we’re trying to address: Poverty. Do minimum-wage adjustments help (however little) ease poverty? The empirical literature says, “Yes.” But is this the only and permanent solution? From an inclusive growth and development point of view, the answer would be “no.” Initiatives like “Graduation Programs,” if done correctly, and in tandem with other robust social protection institutions, can help individuals climb socially and beyond minimum-wage levels.