Had President Uhuru Kenyatta not gifted low-income earners a wage increase of 18 per cent yesterday, it would have meant condemning them to exposure to the high cost of living that is getting out of control.

It would have also meant explaining himself to disgruntled voters over the next three months and convince them that better things are yet to come to win their votes come August 8.

And now that it has happened, the President and his Government have to deal with grumbling by employers and industry stakeholders and probably outright protest by their lobbies.

These lobbies have already said wage increment is unsustainable and threatened layoffs, complicating the complex unemployment situation in Kenya.

This is considering what they say are harsh conditions of doing business. Given that it is an election year, Mr Kenyatta was expected to side with the masses and make a populist announcement of raising wages. He had recently told workers on a tour of industries in Ruaraka that they should expect wage increase.

Last year, the President did not increase the minimum wage on consideration of firms operating locally due to the difficulties that the economy has been going through. And this year, he has had to ward off pressure from industry that had been lobbying the Government to retain minimum wages at the current levels arguing hard economic times.

While it is hard to ignore the restructuring exercises by companies that have resulted in layoffs and some companies that have had to scale down or even stop production in Kenya, it is also difficult not to see how workers have been hit hard by rise in cost of living. According to the Economic Survey 2017, earnings were eroded due to inflation. An example by the Survey are wages for employees in the agriculture sector, where in real terms, the Sh7,284 average minimum wage in 2015 reduced to Sh6,852 in 2016 due to inflation.

A segment of the industry recently warned that an increase in minimum wage during this year’s Labour Day would lead to loss of jobs. The Kenya Association of Manufacturers (KAM) said a rise in wages would require some players to reduce the number of employees so as to be able to pay and be left with a sizeable labour force that they would be able to remunerate within the requirements of the law.

This would in essence make worse the situation low income earners as opposed to bettering their lives as would have been the spirit of the increment.

“The fallacy is that increased minimum wage equals better quality of life for workers. But the truth of the matter is that increased minimum wage will hurt the worker and drive up the cost of living,” said KAM Chair Flora Mutahi in a recent report.

Labour markets

“In general, the business environment, especially for labour-intensive industries has been at best, stagnating instead of thriving and at worst shutting down and relocating to other countries.

“In cases where (labour costs) continues to escalate, these businesses would have to make drastic decisions in order to stay afloat. This includes reducing the number of jobs in order to meet these costs and moving their major operations to cheaper labour markets, in the process exporting local jobs.”

Gerrishon Ikiara an economist, said wage increases should not be tied to Labour Day as has been the tradition in Kenya but rather employers should reward employees based on performance. “Wages are adjusted continuously based on your productivity especially when the companies are doing well. Good employers pass this kind of benefit to the employees on a regular basis,”

“In some cases, employers might feel that productivity has not improved and hence increasing pay for workers is going to reduce the profitability of the companies and could lead to collapse of a company or reduce the level of employment because they cannot sustain the workforce due to high wages and may need to reduce the number of employees.” Emotions and populism, he noted, were behind the rushed enactment of the Banking (Amendment) Act that he noted has had a devastating impact on the financial services industry.

According to Ikiara, the Act, which introduced capping of interest rates on loans by commercial banks has made Kenya’s financial services industry unattractive to investors while local banks have to reduce the number of employees.

He warned that compelling the industry to increase wages especially during hard economic times would have devastating effects, adding that it might see more companies that are pushed to the brink forced to reduce employees to stay afloat. “The capping of interest rate Bill was passed against advice by many economists that it would lead to a number of negative impacts including reduced income by banks and making Kenya unattractive to investors,”

Wage policy

“Within a short time, it is clear that the financial sector, which is key in the Kenyan economy has been slowing down. Banks are cutting down on employment because they are not making enough profits.”

He observed: “If you are forced to increase wages when companies and the economy in general are not doing well, it is going to push companies down.”

Having a minimum wage policy is supposed to protect low income earners from a market that has an oversupply of labour, which might drive down labour costs. Ikiara notes that different parties should engage in an objective manner when discussing minimum wage and by what proportions it should go up.

“Key thing is whether the employers, the trade unions and government exchange information properly in a truthful way without politicising and exaggerating issues. If you make mistakes in making these decisions, there are implications for employees and employers as well as the Government,” he said

Adnan Gainwalla head of research ICEA Lion Asset Managers noted that companies in Kenya have been experiencing a rough time.

This, he said is evident in the layoffs across different sectors as well as closure of some companies, hence the reason why an increase in minimum wage might not sit well with industry.

Kenyans have also seen an increase in the cost of living, a reason why trade unions have been clamouring for an increase in wages. “The economic environment has been quite difficult. We have seen firms increasingly employ cost cutting measures, a lot of firms have reduced staff, frozen hiring new employees and are not giving current employees wage increments,” he said.

“It is probably not the best time to be an employee across different sectors. Financial sectors has been one of those that have been hard hit, largely because of interest rate cap.

The agriculture sectors have been hit because of drought and we have seen manufacturing slowing down and firms moving out because of high cost of doing business in Kenya.”

He noted that just as companies have been affected, so have employees who have had to contend with a high cost of living.

Inflation in April rose to 11.8 per cent, a level last seen in November 2011 when inflation had accelerated to 19.7 per cent. This was mostly on account of increase in food prices, with food inflation rising to 20.98 per cent.

“Inflation has been on the rise and we expect it to continue going up because we have not seen rains come through as was expected.

The cost of living has been going up but earnings are sort of stagnating,” said Gainwalla.