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Editorial: The politics of minimum wage

Published:Friday | January 29, 2016 | 1:00 AM

Audley Shaw, the shadow finance minister, ought to know from hard experience that good politics, too often, isn't the same as good economics.

He, on reflection, would probably concede the bad timing of his implementation, when he was finance minister of the marked-to-market wage hike to teachers, at a cost of J$17 billion. It unleashed pay expectations among public-sector workers that contributed - even before it was negotiated - to the collapse of the economic support agreement with the International Monetary Fund (IMF).

Andrew Holness, the leader of the Jamaica Labour Party (JLP), has robustly defended Mr Shaw's stewardship during his four years at the finance ministry and says that he will be entrusted with the portfolio again if the JLP wins the pending general election. So what Mr Shaw says now about economic policy is taken seriously and may even be presumed to be binding on his party.

It is in that context that we note Mr Shaw's suggestion in Parliament this week for the indexing of Jamaica's minimum wage to the US dollar to ensure that workers at the lower end of the economic scale are assured of a 'living wage'. That wage, he proposes, should be US$5,000 per annum.

In a country where poverty hovers around 20 per cent of the population and the gap between the rich and the poor is wide (Gini Index 45.5), it is not hard to be sympathetic to Mr Shaw's idea. The question, though, is whether, in the existent circumstance, it would be sensible economics.

The Government recently announced a 10.7 per cent increase in Jamaica's minimum wage to J$6,200, or around US$51 weekly. On the basis of Mr Shaw's proposal, at the current exchange rate, a minimum wage indexed at US$5,000 a year would translate to a weekly wage of J$11,634. 61.

Put another way, it would mean, approximately, an increase of 88 per cent on the current minimum wage. Any such policy would look good in a party's manifesto and would possibly be good for more than a handful of votes. Although, to be fair to Mr Shaw, he didn't claim to be declaring a manifesto policy for the JLP.

GIVE IT SERIOUS THOUGHT

Nonetheless, the shadow finance minister should be clear about raising expectations. Wage hikes are not affordable by fiat, but a real ability to pay. Additionally, any consideration of this kind of indexing must be subject to thoughtful consideration for its impact on the use of exchange-rate adjustment as a tool for competitiveness.

Further, though hard, credible data on workers in the minimum-wage category are not readily available, it can be assumed that a large number of them are in household and other informal employment or are hired by small businesses with low turnover, tight margins and little profit. A legislated steep hike in the minimum wage could have the unintended consequence of throwing large numbers of people out of work and deeper into poverty.

This, however, is not to suggest that nothing be done. The best antidote to low wages are credible macroeconomic policies that instill investor confidence, leading to economic growth and employment creation, matched by rising labour productivity, which, unfortunately, has been declining by an average one per cent annually in recent decades.

Mr Shaw has put an idea on the table. Hopefully, he will expand the debate.