Minimum Wage and a Balanced-and-Evidenced-based Approach

Minimum Wage and a Balanced-and-Evidenced-based Approach

Contributed by the Belize Chamber of Commerce & Industry

“Many countries have discovered that a gap exists between the legitimate needs of workers and their families and what the economy is capable of paying in terms of minimum wages. It will not be possible to eliminate this gap in a single minimum wage adjustment, at least not without adverse economic effects. This suggests that there should be a medium- to long-term target for this policy – that is, closing this gap in successive, gradual adjustments”—International Labour Organization (ILO)’s Minimum Wage Policy Guide (2016).

“What is the Belize private sector’s position on the minimum wage uprate?” In short, the Belize Chamber of Commerce and Industry (BCCI) has been on record for some time now saying that it actually supports an increase in the legislated minimum hourly rate. However, the distinction between our position and that of the government emerges as it pertains to the size and timing of the increase. For the BCCI’s part, we have adopted the International Labour Organization’s (ILO)’s prescription for a Balanced-and-Evidenced-based Approach. And based on that approach, we have consistently advised a gradual, phased-in set of adjustments to reach the policy target of $5.00 an hour.

So, before proceeding, we wish to be clear. The BCCI’s position is not to oppose the eventual arrival at a $5.00 an hour minimum wage. The BCCI’s position is that the journey to $5.00— which represents a significant 52% increase from $3.30—should be gradually implemented over a three-year period. This would give employers sufficient time to make the requisite adjustments and hopefully stave off any of the potentially adverse effects of increasing the minimum wage too fast and too soon.

Speaking of too fast and too soon, as articulated in the opening quote, the ILO—a United Nations agency with a specific, tripartite mandate—notes that it is not possible to bridge the gap between workers’ needs and the economy’s ability to pay “in a single minimum wage adjustment, at least not without adverse economic effects.” Instead, the organization advises “that there should be a medium- to long-term target for this policy … closing this gap in successive, gradual adjustments.”

The ILO’s rationale for proposing such an approach is governed by the wish to have economies avoid negative spill-over effects that are more likely on account of acute uprates that do not consider both sides of the labour market.

Needs of Workers

But before digging deeper into those “adverse effects” that the ILO cautions about, there is prudence in discussing the needs of workers. There are multiple ways we could approach this aspect, but if we look at Voorend, Anker and Anker (2021)’s Living Wage Report for Rural Belize, they estimated a monthly “living wage” of $905 per month, a figure that translate to about $4.64 per hour.

More precisely, as the Voorend, Anker and Anker (2021) observed: “The net living wage estimate (i.e. take-home pay required) for rural Belize for May 2021 is BZ$ 881 (US$ 437) per month. When mandatory payroll deductions for the public social security system (SSB) are added (BZ$ 23.53), the gross living wage is BZ$ 905 (US$ 449).”

Interestingly, the trio’s findings are within the same range for the vulnerability-to-poverty line (VPL), once adjusted for inflation. Depending on the time frame (i.e. Dec 2021 or up to August 2022) used, the inflation-adjusted VPL falls between $4.50 and $4.75 per hour.

Difference between Minimum Wage and Living Wage

Now, we must be clear here: There is a difference between a “Minimum Wage” and a “Living Wage.” As explained by one key source, “A minimum wage is mandatory, [and] determined through legislation. It should meet an individual’s basic requirement but may still imply that a worker relies on government subsidies for additional income.”

In terms of the Living Wage, the same source states: “A Living Wage is not obligatory, but paid voluntarily. …Paying workers a living wage might motivate them to stay with the company, thus reducing recruitment and training costs. It makes for healthier employees, thus reducing the loss of working hours due to sickness. Thus, the concept of a Living Wage takes the needs of both businesses and workers into consideration.”

The aforementioned figure from Voorend, Anker and Anker (2021) and that from the inflation-adjusted VPL are more aligned and reflective of calculations for the “Living Wage,” which in many countries is notably larger than the legislated minimum wage.

For this reason, and based on available data from Voorend, Anker and Anker (2021) as well as the VPL-based estimates, the $5.00 proposal by Government is actually best defined as a “Living Wage” as opposed to a minimum-wage.

More precisely, government’s target is eight percent higher than the $4.64 per hour that Belize’s Living Wage report informs. And given that “Living Wages” are generally voluntary, this higher figure (i.e. GOB’s $5.00) should be voluntary, at least for the next three years. Employers than can afford the “Living Wage” are encouraged to do so, but there is also the reality that there are enterprises that are unable to sustain such a wide increase in a single adjustment.

But! What about the Minimum Wage?

Now, the immediately preceding statement ought NOT to be taken that the BCCI is saying that the actual minimum wage should remain at $3.30. That is not, and has never been our position. On the contrary, the BCCI’s secretariat had gone as far as to produce a minimum-wage adjustment formula that takes into account—as its base—the General Poverty Line (GPL).

The GPL—as reported by the Statistical Institute of Belize (SIB) as $7961 (or about $3.40 an hour) based on 2018 data—would be closer to $9,000 today. Voorend, Anker and Anker (2021), for their part, placed the inflation adjusted GPL at approximately $9,170, a figure that converts to an hourly rate of $3.92 per hour.

Furthermore, it is possible to demonstrate that between 2012 and today, the cumulative rate inflation has increased by roughly 16 percent. Therefore, the $3.30 that was established in 2012—and was not increased in accordance with inflation of the last ten years—legitimately should have increased to at least $3.80 per hour.

Consequently, in our view, an initial 20 percent (instead of a 52%) hike in the minimum wage in the first instance is more justifiable and consistent with the Balanced-and-Evidenced-Based approach. A year later, the government could advance the minimum wage by another 12.5%, and in 2025 make the final adjustment to the desired $5.00.

The Benchmarks and Compromise

Okay, so let’s recap a few things. First, the BCCI advocates the application of the ILO’s Balanced-and-Evidenced-Based Approach when it comes to the minimum wage uprates. Second, with the ILO’s recommended approach in mind, we hold the view that there is more sound reasoning for a first-instance jump by 20% as opposed to the current administration’s manifesto promise of 52% (i.e. $3.30 to $5.00, practically overnight). Third, there is a distinction between a “minimum wage” and a “living wage,” with the latter—which is usually used voluntarily by employers—having already been estimated to be between $4.60 and $4.75.

Now, we just reiterated the point that the BCCI can find logic in supporting a first-instance approximately 20% increase in the minimum wage (essentially bringing it closer to $4.00), and we stand by that for several reasons. First of all, it ensures that minimum-wage earners are above the General Poverty Line. Next, that mark is above where it would have stood had $3.30 been adjusted for inflation. And while we haven’t, in this article, elaborated on the minimum-wage adjustment formula that we have proposed, it is suffice to say that the aforementioned formula (which takes into account the GPL, economic growth, inflation, and levels of productivity) also supports the 20% first-instance increase.

At the same time, however, it must be appreciated that even that 20%—which we support—is notably above the conventional increases. A look at the nominal increases in the legislated minimum among OECD countries, for example, would inform that the average, annual change is approximately six percent (see stats.oecd.org).

One would observe (again in nominal terms) a significant 112% jump in Turkiye’s (formerly Turkey) minimum wage, but that is explained by the current struggling monetary conditions in the country. Apart from experiencing inflation of more than 80%, Turkiye’s currency has depreciated significantly, thereby, leading to a real-wage change of only 1.6%. Even with Turkiye’s outlier-like data being included, the average is still six percent (6%) or less.

When that average (6%) is considered, one would have to appreciate that a 52% one-off increase is almost nine times that international benchmark. Even our acceptance of the 20% in the first instance is more than three times that average. Both magnitudes could be accused of violating the Balanced-and-Evidenced-Based approach. However, given the macroeconomic and political context within which this decision is to be made, compromises to known best practices have become somewhat necessary.

Potential Adverse Effects

Finally, there is a reason why the ILO advises the Balanced-and-Evidenced-Based approach. Fundamentally, while the minimum-wage literature is a mixed bag, it is possible that too sharp increases can trigger those “adverse economic effects” that the ILO referenced in its policy guide.

For example, in a 2019 study by the Institute of Labour Economics (IZA) (Laporsek et. al, 2019), one would find the following concluding words:

“The large minimum wage increase triggered substitution away from minimum wage workers and lowered the likelihood that low-skill workers would be hired. We find evidence that part of the substitution is due to a shift in relative demand toward more super-minimum workers as the minimum wage continued to rise relative to average wages. … The large minimum wage increase may have altered firms’ investment decisions toward greater use of automation or other capital-intensive production methods. Firms may also have responded to the minimum wage hike by cutting back on output or by ceasing production.”

The study, which looked an approximately 30% hike in Slovenia’s minimum wage over a four-year period (which it considers a large increase, by the way) also was found to have disemployment effects for low-skilled workers.

“It shows that Slovenia’s March 2010 increase of the minimum wage, while increasing earnings of workers that retained employment after the wage increase, reduced employment of the low-skilled workers more than proportionally,” the authors wrote, adding, “As a result, the policy failed to redistribute earnings to low-skill workers as a whole.”

An intriguing takeaway is found in the following statement: “In real terms, the minimum wage rose by almost one-third and the ratio of the minimum wage to the average wage rose from 41.2% to 51.5% over 4 years.” That’s a 10.3 percentage point increase spread across four years, and that was deemed “large.” We really should let that sink in.

In real terms, Belize’s current minimum wage is about 55% of our average earning (i.e. $1168 per month according to the SIB). Again, in real terms, the sudden jump to $5.00 would increase this ratio to 83%, which represent a 28 percentage-point increase.

The BCCI’s middle-ground position of a relatively smaller increase by 20% would suggest a minimum wage that is about 67% of the average income. This, of course, is a 12 percentage point increase, which is still larger than Slovenia’s 10 percentage-point (over four years), but, again, economic and political conditions demand some deviations from international best practice, while still staying as close as possible to the tenets of the Balanced-and-Evidenced-based approach.

There can be adverse effects in Belize. The fact is that we have two groups of employers: Those who say that they may have to consider laying off workers or passing on the increased costs to end consumers, or both. The other group is made of up of those who have already been paying above the minimum wage. It is possible, however, that some in the latter group are yet to appreciate the rippling effect that too sharp of a change could have even on non-minimum-wage employees’ payroll demands and costs.

Subsidies for Additional Income

Of course, someone may make the point that a phased-in approach leaves persons below the living-wage threshold. That is a sound argument, but there is value, at this point, to reiterate a quote used earlier:

“A minimum wage is mandatory, [and] determined through legislation. It should meet an individual’s basic requirement but may still imply that a work relies on government subsidies for additional income.”

The fact is that the minimum wage was never designed to work in isolation from other social-protection programs and policies. The gap between the “Living Wage” and the phased-in “Minimum Wage” should be filled by the taxpayer-funded government’s social assistance, social insurance, social care, and active labour market intervention policies.

While the discourse is fixed on the legislated minimum, it is worth reminding that all citizens (private sector and non-private sector) all contribute to the public purse with an understanding that the government will, inter alia, assist in redistributive policies. What, then, is the status for Belize’s social protection programs? How robust is its programs to assist the vulnerable households and individuals? Is the administration of any subsidy program adequate? Is the level of spending in such programs sufficient? These matters and more must be looked at carefully.

In the End

Let us end how we started. At no point did the BCCI ever say it is opposed to a minimum-wage adjustment. However, the call for a responsible, phased-in, evidenced-based approach is governed by empirical data and policy guidance from the likes of the ILO.

As stated earlier, there is a distinct difference between a “Living Wage” and a “Minimum Wage,” and it is important that in trying to reach the former, we do not allow the latter to create those “adverse economic effects” that even the ILO warns about.

The average increases among OECD countries approximates about six percent, because most jurisdictions heed the advice of the International Labour Organization that says that the needs of the workers and the ability of the economy to pay must be taken into account. We encourage, therefore, all stakeholders to investigate and learn more about the specifics of the Balanced-and-Evidenced-Based Approach as we move forward on this important policy matter.