Minimum Wage Regime Not a Relief from Labour Woes

Factory workers inside the Bole Lemi Industrial Park have been on strike this week, protesting what they say are harsh working conditions and low wages. It is the latest manifestation of the criticisms usually thrown by bodies such as the International Labour Organisation (ILO) and the Confederation of Ethiopian Trade Unions (CETU) at employers inside the park.

They have attributed the high turnover rate in factories inside the industrial parks that have come online to be lack of strong labour unions and depressed wages. While there has never been direct resistance to the former, there is controversy over whether or not minimum wages should apply to Ethiopia.

For a party that had its roots in the left, the ruling EPRDFites` attitude towards minimum wages has been quite laissez-faire. There is currently no legally binding wage floor for those employed in the private sector. An employee sells labour at any price deemed appropriate as long as the employer is willing to buy.

But this arrangement can be unfair to workers, according to Kassahun Follo, head of the Confederation. His remedy for the low-wage problem may be wrong, but his assessment of why it exists is accurate. He rightly points out that there are two crucial fundamentals in the labour market: job opportunities and the labour force.

While the latter could be found in abundance in a nation where the average age is less than 19-year old, job opportunities are scarce. Thus, employers, as they control the rarer resource, have the upper hand. They can set a meagre price at which they are willing to hire, and still not worry about the lack of takers.

The government has been careful not to upset this dynamic further. Officials point out imposition of minimum wages would hurt the flow of foreign direct investment (FDI), taking with it years of planning and investment to bring about a structural economic transformation from agriculture to industry.

While the external sector, cost of living, and revenues from tourism have been disappointing for the past two years as unrests took place in parts of the country, FDI has been loyal. Torched factories have not kept overseas companies from coming to Ethiopia to open up shop. Last year, FDI grew by almost 28pc, and in the first half of the current fiscal year, by 22pc with 2.2 billion dollars’ worth of investments recorded.

While investors do point out that improving infrastructure and incentives have come in handy, they have stressed that low-cost labour is a fundamental reason for choosing to invest in Ethiopia. As the primary objective of firms is to worry about the bottom line, cost minimisation is just as useful a tool as revenue maximisation. A minimum wage regime could wreck this equation and rock the boat of an area of the economy that is performing well.

A new study was undertaken by the Addis Abeba University (AAU) to gauge out what the minimum wage should target to find that middle ground. It will be presented to stakeholders such as the Confederation and the Ethiopian Employers Federation (EFF) for discussion very soon.

While the Confederation would like to see a minimum wage included in the draft labour law currently pending at the Council of Ministers, the Federation’s position is that such laws would hurt the business environment. It is an unpopular sentiment to hold that the government should not interfere when it comes to wages, primarily as the cost of living has increased for most of this fiscal year except for the recent dip to 13.7pc last month.

It unavoidably leads to employee dissatisfaction and the loss of morale. But to hold that minimum wages will deliver the nation from the woes of low incomes is too good an antidote to be right. While the argument has presciently focused on how a wage floor would affect the flow in FDI, the complications it can bring to the private sector and the economy requires more attention.

No doubt the cost of doing business would increase. This, coupled with a 16.5pc credit cap and the forex crunch, would further weaken the private sector. Surging cost of labour would mean less appetite for existing firms to expand, and prospective investors would be reluctant to venture. Both of these effects lead to high unemployment and divert human capital away from the formal sector.

In a classical Marxian view the effects of higher wages can also depend on the “capitalist”. Employers could continue to expand, and new businesses may come online, but they would also make their products costlier, giving rise to what is known as wage-push inflation.

The result could be inflation and not merely because of firms that send prices of their products to the roof aiming to counter a minimum wage. They would be speculating that consumers now have higher spending power.

Minimum wages are not always detrimental to an economy, though. They should be employed to ensure a glitch in the system is addressed. If there is a group that is earning far less than the average national income, a minimum wage ought to be applied to protect those falling off the social welfare.

Per capita income stands at 783 dollars in Ethiopia, one of the lowest in the world, according to the World Bank. It is an indication of the low wages applied to a large segment of the population. Imposing a minimum wage hardly addresses it, just as monetary measures were unable to adequately respond to inflationary pressure and the devaluation of the Birr has not meaningfully encouraged exports.

It may be just another quick fix to an intricate problem. Low wages, akin to stagnant export earnings, inflation and inadequate domestic revenues are symptomatic of a flaw in the economy. The labour absorption capacity of the private sector has been severely constrained as it could not afford to continue to create enough employment opportunities.

Stimulating the private sector could be a policy worth contemplating to create more jobs as it requires availing businesses with capital. It is unattainable while a credit cap is active and there is a higher minimum interest rate on deposits at seven percent. The former holds back investment while the latter forces banks to swell their loan rates, further discouraging those that need credit. Reducing the deposit interest rate floor and removing the credit cap could be the first order of businesses for the Administration of Prime Minister Abiy Ahmed.

Introducing progressive taxes on corporate profit can also go a long way in helping firms retain their cash for possible expansions, hence assist in more jobs. The more consumers have to spend the more they encourage businesses to expand, and new firms enter the game, creating jobs along the way.

Granted, such measures may counter policymakers’ effort to arrest the inflationary pressure. They may fear it discourages national savings, which is already too low compared to the size of the economy. Their concerns are reasonable. But the authorities must recognise that narrowly designed policies or regulations are bound to create an adverse ripple effect in the marketplace. Their primary concern should focus on the game plan – building a vibrant private sector that could address the supply constraint.

Low unemployment rates and affordable incomes often go hand in hand with a depressed inflationary rate, sufficient exports and enhanced domestic revenues. None could be realised as long as productivity – an economic fundamental policymakers have to pay strict attention to – remain in the gutter.

Indeed, the authorities ought to take note of working conditions of the labour force and ensure that they are treated with dignity. Employers must recognise workplace safety and workers’ rights, such as maternity leaves and sick days. Leaders of labour unions must likewise be supported to organise the labour forces, especially in industries, to give employees collective bargaining powers and duly inform them of their rights.

But minimum wages should not precede a healthy economy. Imposing it in an environment that is unfriendly to the private sector will only add to the downward macroeconomic spiral.

Published on May 19,2018 [ Vol 19 ,No 942]



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