Raising the minimum wage can only go so far in cushioning poor workers
| May 10th 2022 | 4 min read
On Labour Day last week, President Uhuru Kenyatta raised the minimum wage by 12 per cent amidst cheers from the crowd. But is 12 per cent good enough, and are employers justified in opposing the increment?
The raise was expected in an election year, but what does it mean to the economy, employers and employees?
Inflation is currently about six per cent. So a 12 per cent increase is eroded by inflation to about six per cent.
On the basis that it covered the inflation rate, it was a good increment. Our wages and salaries should be indexed to inflation to protect our purchasing power. A yearly adjustment would do the trick.
Inflation is not the only factor to consider in raising wages. A better factor would be productivity. If workers become more productive, producing more with less, we can easily raise their wages or salaries without worrying about inflation.
That is why the Federation of Kenya Employers was quick to oppose the raise. It will erode their profits and could threaten some firms already ravaged by high fuel prices and Covid-19.
Unlike businessmen who will simply pass their costs to customers, employers will not easily get a salary raise because inflation has gone up.
The late British economist John Keynes observed that wages are sticky.
It takes time for them to adjust. It is not surprising because it is one of the factors employers have good control over. Unions try to fight for better wages but rarely base it on productivity.
It is worth noting that the latest Economic Survey indicates that wages have been growing sluggishly, supporting Mr Keyne’s observation.
Do you recall salary cuts when Covid-19 hit? Employers might not be that fast in restoring salaries or wages to the pre-Covid-19 level. Wage increase has unintended consequences. One is that it could spur more inflation.
The market knows when there is more money and will increase the prices further. That is why there should be a cap on how much politicians can use to campaign to reduce the amount of money in the economy that is not backed by productivity.
Two, it could lead to a rise in unemployment. How can a firm reduce its wage bill?
The simple option is to reduce the number of workers to a minimum. The remaining workers could be given a raise based on extra work.
Few have the guts to go to court where such cases could drag for years. The other alternative is to use more technology. Banks have been shedding off employees as we shift to online and mobile banking.
If tea picking can be mechanised, what can’t? We should, however, not fear technology; in the long run, it creates more jobs than it destroys. It also makes our work more pleasant and meaningful.
This leads to a more important question: should wages be determined by the market or the government? There is a universal practice where governments set the minimum wage. This is meant to protect the workers from exploitation by employers. The minimum wage considers the average cost of living.
Some professions like insurers, lawyers and doctors also set the minimum charges to stop undercutting.
Does that distort the laws of economics, leading to higher than equilibrium prices? Why is the cost of legal services going up with more lawyers getting into the market?
Unions want their members paid as much as possible, while employers want the pay to be as low as possible.
Why not let the market determine the wages based on supply and demand? Unions by setting artificially high wages contribute to employment. Few of their leaders will admit that. Who wants to invest in a country with high wages? The thinking behind government intervention is that the market is not efficient and could fail.
The key factor in the labour market is human beings, much different from other factors of production like land.
Further, employers have too much power in a market like Kenya where unemployment is high.
If the economy were growing faster and employees had job choices, that would naturally raise wages and no one would bother about minimum wage.
The current economic situation means that wages should be going down with so many job seekers.
There is even volunteerism - people willing to work for free to gain skills or feel useful. Noted the popularity of internships? Is it free labour?
Setting minimum wage is a short-term measure. Let’s make it easy to invest and create jobs. Let’s produce high-quality goods and services for the global market, and quality jobs will come calling. By the way, who ensures that minimum wage is enforced, particularly in the private sector?
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