Every year around this time, Colombia's politicians, labor unions and entrepreneurs have one of the most difficult tasks in the country: bargaining about the rise of the minimum wage. And every year history repeats itself: the discussions do not lead to an agreement and the government ends up proclaiming the new minimum wage by decree.
For 2008, Colombia's minimum wage was set a mere 461,500 pesos a month plus 55,000 pesos for transportation (around US$200 plus US$25). Powerful labor unions (such as the Central Unitaria de Trabajadores, CUT, and the Confederación General del Trabajo, CGT) complain that this is too little, and demand that the government decree a rise of 14%. CEOs and other employers, backed by the government, consider that such a steep increase of the minimum wage is "unthinkable".
As of today, the representatives of Colombia's largest employers have proposed to augment the minimum wage by 6.5% for 2009. According to the country's Constitutional Court, this would be illegal: in 1999 the Court ruled that the increase could never be below inflation, which is likely to be 7,5% for this year.
So far, the negotiations between the parties have stalled and it is difficult to tell what will happen. The workers complain (rightly) that Colombia's minimum wage is simply too small. El Tiempo, a newspaper, estimates that today's minimum wage has the same purchase power as the minimum wage of the year 2000. To put it bluntly, the four million Colombians who earn the minimum wage are no better today than they were eight years ago, even if their salaries have increased continually in nominal terms.
On their side, employers complain (rightly, as well) that production costs have risen uncontrollably this year already, and that a steep rise of the minimum wage would hinder their ability to give and maintain jobs. The Colombian state, itself the country's largest single employer and the greatest payer of pensions, is also concerned about the adverse effect that a sharp increase of the minimum wage could have on public finances. A higher minimum wage, of course, means greater expenditures on the part of the state.
Colombians seem to have put themselves into a situation from which there is no easy exit. Regardless of whatever decision the government makes, someone is bound to be disappointed. What should be done? Compassionate people and leftists (please note the difference) will argue that four million workers earning just about US$ 200 a month is an utterly unacceptable reality that needs to be changed. The government should put the interests of the workers before those of their greedy, rich employers, and decree the 14% rise demanded by the labor unions. It is time to make some justice.
Well, not quite. A steep rise of the minimum wage would be a dangerous and probably ineffectual measure. It is also likely to backfire. Labor unions complain that the high inflation is the reason why they need a 14% rise on their salaries. But listening to those demands would only exacerbate inflation, because 4 million people would, all of a sudden, have 14% more money in their pockets, making prices rise along with the minimum wage. If the government approves a sharp increase of the minimum wage, Colombia's central bank, Banco de la República, will be more reluctant to lower interest rates, given that it would be obliged to fight the effects of a larger money supply in the market. In the medium term, even with a 14% increase, workers would find themselves in the same situation as today -discovering that their money's worth is not what it used to be.
In addition, with unemployment standing at around 10 to 11%, it would be irresponsible to increase the minimum wage by, say, more than 8 or 9%. Colombia's small and medium enterprises (SMEs) already hire a disproportionate amount of minimum wage earners. Yielding to the labor union's demands and giving them a 14% increase, would put hundreds of small and medium entrepreneurs in a very difficult position: with the same money they could pay for 10 employees in 2008, they would only be able to hire 8 in 2009 -labor (especially unskilled labor) would become more expensive. Hence, employers would have to make a choice between assuming that rise in labor costs (those who can afford it will do so) or firing some employees that are not completely essential in order to keep things running. Augmenting the minimum wage by 14% is likely to create more unemployment in an already slowing economy (the World Bank estimates that Colombia's output will grow a sad 2.5% in 2009). Needless to say, those more likely to be fired under the 14%-rise scenario are unskilled workers, for they are those who earn the minimum wage- and these workers usually come from the poorest ranks of society. Paradoxically, a sharp increase of the minimum wage could harm those it is meant to protect.
As I said, there is no solution that could possibly please everybody. Give the labor unions what they want, and many will probably salute the measure as a great advance for social justice, but it would be a blow for employers and state finances. Increase the minimum wage by less than 7,5% and strikes of angry workers will ensue, not to mention a likely rebuke from the Constitutional Court.
In principle,the minimum wage is a beneficial mechanism: the state protects employees from exploitation, making sure that everybody receives a fair amount of money for his labor. Moreover, the minimum wage is also better than other welfare-state mechanisms: at least people are being paid in order to work and not for sitting at home and staying poor.
In reality, however, the minimum wage creates a lot more difficulties and problems than it solves: as we saw, it is likely to exacerbate price increases, worsen unemployment, hurt small businesses and affect unskilled workers by making them unemployable under the salary ordered by the state. A minimum wage can also help increase the size of the so-called informal sector, that part of the economy that functions outside the boundaries of the law: while 4 million people earn the minimum wage, 8 million Colombians earn lower salaries. Although these numbers may be exaggerated, the point is that the informal economy in Colombia is huge: between 40 and 50 per cent of urban employees work under some sort of informal agreement outside the control of the State. Many of them earn less than the minimum wage. To me, this shows that minimum-wage policies fail to produce all of the benefits they are supposed to create while leaving behind a good deal of social, political and economic trouble.
Granted, having a minimum wage may be good for many people who are receiving more money for their unskilled labor than they would in a totally free economy. Nonetheless, many more unskilled workers are rendered unemployable or are being pushed to the informal economy, where the State can neither work as an umpire in labor disputes nor uphold contracts.
I believe that a modern, civilized and prosperous society can exist without a minimum wage. For example, Hong Kong, Denmark, Singapore and Norway are places with buoyant economies where there is no minimum wage law. On the other hand, we need to acknowledge that 90% of countries do have some type of minimum wage policy in place. Needless to say, no one thinks about scrapping the minimum wage in Colombia: it would be political suicide. In the meantime, people somewhere in Bogotá continue to bargain in heated discussions that will lead nowhere, as usual. The likeliest scenario is that the government will end up decreeing the rise in the minimum wage by 7,5 to 8%. This will stop the debate which is bound to resume a year from now.