What Is The Right Minimum Wage?

  Director of the Executive MBA programme at the Fiji National University, Rohit Kishore, believes getting the right wage policy is the country’s key economic challenge. He made the comment
26 Oct 2018 10:00
What Is The Right Minimum Wage?
Director of the Executive MBA programme at the Fiji National University


Director of the Executive MBA programme at the Fiji National University, Rohit Kishore, believes getting the right wage policy is the country’s key economic challenge.

He made the comment in regards to remarks about the minimum wage by several political parties ahead of the November 14 election.

When approached by the Fiji Sun Mr Kishore said he believed the Government had done widespread consultation on the minimum wage rate.

The following are excerpts from a question and answer session with him.

Q: As an economist what is your view about the minimum wage proposed by several political parties?

A: A living wage is the minimum wage income necessary for employees to meet their basic needs such as food, housing, education, utilities, transport, health care, child care and other daily necessities – necessary to afford the basics for a modest, but decent life.

It is the wage level which keeps basic family income above the poverty line. The current minimum wage rate of $2.68 and given the overall cost of living it is perhaps not able to do so and hence there may be a case for increasing minimum wages.

But what is the right wage? This is the bigger and perhaps the key question that the policymakers and politicians need to answer. I hope they have done their homework well and are able to provide the “just basis” for their suggested higher wage rates.

The Government, on the other hand, has carried out detailed studies in increasing the minimum wages from $2.30 to $2.68.

The inference is that the Government ought to have taken into account all the necessary considerations in fixing the minimum wage rate. It has to be the complete package.

For example, on the fiscal side the Government has increased the income tax threshold to $30,000, which means all those on minimum wages do not pay any tax.

There are also other grants and incentive packages for lower income earners, which would assist them in meeting their basic necessities.

On the monetary policy side, the interest rate has been kept low, which has been providing continuous economic growth over the last decade.

This means labour demand ought to be high, which through the market forces of supply and demand kept real wages above the minimum wage rate of $2.68. The low unemployment rate provides the evidence for this.

An interesting question to ask would be, what percentage of workers are really paid absolute minimum wage of $2.68? My take is a very low per cent. And this would be in the case of unskilled workers doing basic job.

If you want to retain good workers you have to pay them high wages otherwise they leave. Something to be noted is that there are sector minimum wage rates, which are higher than the national minimum wage rate.

For example, in the hotel and tourism industry, no worker is to be paid less than $3.05. Most of the unskilled workers in this industry are paid $3.50 to $5. Skilled workers are paid more.

Q: Do you think it will be possible to change the minimum wage to $4 in 100 days? Or $5 and even up to $10?

A: Yes and no. The answer depends on the make-up of the new Parliament. Who is in power and what is the majority of the Government? If it is a majority government then perhaps it could be done as policies are debated and voted for implementation. However, if it is a minority government than getting confronting policies through may be difficult or even impossible.

Q: Will there be loss of jobs if there is a sudden increase in the minimum wage?

A: Any wages has to be a “win” for both employers and employees and the wages has to be in alignment with productivity increase. Given the continuous economic growth over the past decade or so suggests productivity growth and hence ought to provide some capacity to employers for higher wages.

However, is it enough? Therefore, the wage increase policy to $4, $5 or $10 has to have a compensation element in it; in the absence of which the businesspeople, being entrepreneurs and capitalist in nature, will either pass on the increased cost of production factor, wages in this case, to the consumers through price increases of goods and services.

Or if given the competition in the market place, they are not able to pass the increase in the prices they will cut back on the number of employees.

Private businesses operate on the theory of “profit maximization”, which, inter alia, provides the basis for not absorbing any increase in the cost of production factor in their profit bottom-line; rather passing them on to the consumers. It is also very worthy to note that business profit margins, over the years, have been under pressure from other reasons.

Therefore, even if businesses, particularly small businesses and also large businesses with a larger quantum of employees for routine jobs, want to absorb wage increases they will not be able to.

Therefore, to avoid job losses my suggestion is that any wage increase has to be brought through a complete microeconomic reform package with compensations built in through fiscal and economic policies.

Q: The Textile, Clothing and Footwear Industry has issued a statement saying 7000 jobs will be lost because such an increase would be unsustainable. Your comments?

A: The textile industry is a large quantum employer for routine work. This is perhaps one sector which may be paying its employees minimum wages or wages not much higher than the minimum wage rate.

So, for arguments sake, if most textile workers are paid say $2.70 per hour for 40 hours per week, each would be paid $108.00 plus 10% FNPF = $118.80 total wages for each employee. Now with regularised minimum wages of $5.00 per hour, the same employee needs to be paid $50 * 40 = $200.00 plus 10% FNPF total wages of $220.00 per week. For 7000 workers the current total weekly wages would be 7000 * $118.80 = $831,600, and the new wages bill would be 7000 * 220 = $1,540,000. The difference in the weekly wages bill is $1,540,000 – 831,600 = $708,400; monthly is $2,833,600 and yearly would be $34,003,200. So, a $5 new wage rate is going to have a serious impact on the employers in the textile industry.

On the other hand, however, these textile workers are living well below the poverty line wage rate and surely need a decent living wage.

However, to make the situation “win win” for both parties, any new higher wages policy needs to be very well thought out and have the integral compensation element in it, generally for all employers in the absence of productivity increase, particularly for large scale quantum workers to provide them with the capacity to pay higher wages.

Q: Any further comments on this issue?

A: In my view getting the right wage policy is the country’s key economic challenge.

However, to get it right a well-researched microeconomic reform package has to be put out utilising both the fiscal and monetary economic policies. Employees need minimum income necessary for them to meet their basic needs. Public policies need to provide a living wage that is adequate in securing a living with dignity and decency.

However, at the same time wages have to be aligned with productive growth and free market forces allowed to fix wages through supply and demand, and wages not only enforced through regularity intervention.

In the absence of such productivity growth which is able to support a decent living wages, polices must have compensation elements in them to avoid job losses on the one hand and increase in prices of goods and services on the other.

Edited by Epineri Vula


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