The question of minimum wage has been hotly debated for decades by economists and politicians alike. Lately, the debate in many countries has increasingly been less on the utility of a minimum wage and instead on its periodical cost-of-living adjustments. Ethiopia is a prominent laggard in this respect, with a statutory minimum wage conspicuously absent from its labor market policies or safety nets. It does have a minimum pay for civil servants, though. But as it turns out, setting a legal minimum on wages today would make a lot of sense.
For sure, the Confederation of Ethiopian Trade Unions (CETU) has been demanding extension of minimum-wage regulations to workers in public and private enterprises. But the government has so far remained cautious in its approach to the matter. Ethiopia’s Labor Proclamation of 2019 does provide for the establishment of an all-inclusive “wage board that will periodically revise minimum wages,” albeit somewhat bewilderingly given there is no national minimum wage to begin with. Yet Ethiopia has not ratified the International Labor Organization’s Minimum Wage Fixing Convention of 1970, despite marking the centenary anniversary of its ILO membership.
However, the immediacy of the need to provide greater economic security to low-income families is undeniable. The cost of living in Ethiopia has gone through the roof, turbocharged by negative collateral effects from Washington Consensus-like reforms. Incomes in real terms have nosedived; the poor and the working class are staring into a financial abyss. Heartbreaking stories of Ethiopians failing to make a living despite working full-time and often in wretched conditions are not news. And one reason for workers’ heightened economic plight is that their wages have lagged far behind inflation; another is effective tax overburden. Needless to say, the workers are calling for faster wage hikes as their real wages plummet before their very eyes.
To be fair, the gravity of workers’ pittance has not been completely lost on the policymakers. Not long ago, the federal government more than tripled the minimum pay for civil servants from a mere ETB 1,500 (USD 11, at current exchange rates) to ETB 4,800 (USD 35) per month. But the fate of low-wage workers in public and private enterprises – including those in the industrial parks – has been left ostensibly to the labor market, in actuality at employers’ mercy.
The problem is that the market economy is inherently amoral. It treats labor very much like a commodity. Employers, being in business to maximize profit, pay as little as possible. And they are able to pay low wages when alternative opportunities for workers are minimal as is the case in Ethiopia. To put it baldly, the alternative for workers may well be living on a garbage dump or even worse. Still, the working poor do not necessarily deserve their poverty wages. You might argue that their productivity is pretty low, but is it really fair to expect more from food-insecure workers? On the other hand, one of the primary moral functions of a contemporary state is to promote the economic well-being of its citizens. And mandating a wage floor is the least the government can do to protect the least-paid against exploitation and provide more social justice.
Of course, morality aside, we must also ask key economic questions. Firstly, do minimum wages reduce the incentive to create jobs, or price some workers out of the market? Theoretically, they can. The labor market is supposed to be governed by the forces of supply and demand. So, if a minimum-wage legislation raises the wage rate above the level that balances supply and demand, it reduces the quantity of labor demanded, resulting in loss of employment. But since this loss of employment is thought to concern the unskilled and inexperienced members of the labor force, it is presumed to be small in relative terms. Thus, minimum-wage advocates used to argue that this small trade-off is worth making in order to raise the earnings of the laboring poor.
But in reality, it has become increasingly evident that a minimum wage has very little if any practical impact on jobs. One explanation for this is that the extra cost to firms may be relatively small, especially when the minimum wage is binding for only a fraction of their workforce. An even more important justification is that while paying workers more increases production costs, offsetting benefits accrue to the firm from better morale, lower turnover and greater effort (productiveness) of the workforce. That is, the employer ends up reaping a competitive advantage, instead of losing it. And recent research shows that the net firm-level employment and wage effects of productivity growth have been positive.
At a macro level, too, decent wages do not just reduce in-work poverty and promote quality of life, but boost economic growth through consumption expenditure and productivity channels. Raising incomes of the working poor can also reduce income inequality and distribute economic opportunities, thereby enriching the whole society. The purpose of an economy, after all, is not to revel or dazzle in statistical wonderland, but to improve the standard of living of the majority. And one way growth can trickle down to the average Ethiopian is via wage gains for lower-paid workers. Yes, this wage growth normally results from tighter labor markets, but that is not in sight in Ethiopia thanks to an indomitable “reserve army of labor.” So, as alluded to above, when the invisible hand of the market is debilitated, the government needs to wield its legislative arm.
Here, though, is another economic question: If the federal government flexes its muscles by enacting a minimum wage, does this jeopardize Ethiopia’s ability to attract foreign direct investment (FDI) based on cheap labor and the attendant prospect for industrial growth? Not really. True, for a long time investment in labor-intensive export industries of developing countries was preached and often undertaken by anticipating profit opportunities offered by cheap labor. And workers in those countries would be told to endure their “slave wages” until the export-oriented industrialization process had matured enough to correct them. Essentially, we have workers’ misery justified by invoking their own and their nation’s very economic survival.
But how poor do we need the working poor to be? Surely not as poor as ours are, and not least because it is not at all clear that the price they are paying will be worth it. First, to argue that Ethiopia will reach the “promised land” by pursuing low wage-driven industrialization requires a questionable economic leap of faith. Has Ethiopia not been locked in the production and export of primary commodities for a very long time, all the while having low wages? In fact, low labor productivity is arguably the most binding constraint on Ethiopia’s ability to break into world markets for labor-intensive manufactures. To help overcome this constraint, we need to actually raise labor remuneration, not depress it. Besides, a large proportion of recent FDI in Ethiopian manufacturing has been prompted by market-seeking or import-substituting motives. Finally, in today’s global competition, low labor cost has less of a role to play in determining countries’ relative position. A major factor for this is the fact that foreign rivals can match or even surpass it with higher productivity, or eliminate labor altogether through automation in some industries.
Even if we accept, for the sake of argument, that low-cost labor is the be-all and end-all of Ethiopia’s comparative advantage in attracting manufacturing FDI, a minimum-wage imposition will barely risk waiving it. First, more than 170 countries have one or more minimum wages, so it will not shock or awe investors if Ethiopia legislates its own. In fact, Ethiopia is one of only four countries in Africa without a minimum-wage policy (the others are Eritrea, Somalia and South Sudan – not the most enviable company). Second, the current level of wages at the bottom of the wage distribution is so low by any reasonable standard that it can be raised by some amount without incurring the undesired side effects. Last, our actual and expected currency depreciation works to offset the potential reduction in comparative advantage.
What of the political viability of a minimum-wage law? In the Ethiopian context, it is not in question. Firstly, the law would resonate well with the overwhelming majority of the public. Secondly, the bill can sail through Parliament, not just because the ruling party enjoys an overwhelming majority of the seats, but because the law entails no budgetary allocation. Finally, it is known that an economy that combines rising prices with unduly low wages is often a recipe for political and social unrest. So the legislation would add to headwinds for the latter.
Now, it is one thing to endorse a minimum wage, and quite another to set it appropriately. To serve its intended purpose, the federal wage floor should be set at a level that ensures the minimum acceptable standard of living. More technically, the earnings per month of a minimum-wage worker should be at least equal to the national (total) poverty line. By an already four-year-old estimation (before Birr’s abject surrender in Forex), this would be ETB 8,262 (now USD 60). To ensure that most of the mandatory earnings remain disposable, the gross wages of the said worker should then be taxed after a generous exemption and at the lowest possible tax withholding rate (typically 10%). In light of this, last week’s fiscal policy maneuver that raises the antiquated personal income tax exemption from ETB 600 to a flattering ETB 2,000 for a monthly pay, and raises the bottom withholding rate from 10 to 15%, comes across as pathetic.
This being said, a note of caution is in order. For one thing, a national minimum wage is not meant to provide a decent standard of living, regardless of the extent of taxation. Looking forward, what workers really need to earn to afford their basic needs is a “living wage,” which is also endorsed by the ILO. To that end, workers will have to muster not legislative but bargaining power through trade unions. Beyond this, Ethiopia’s “working poor” includes both wage and non-wage earners, so the minimum-wage protection itself will not reach out to the latter. And even within the wage earners, a pragmatic approach in Ethiopia dictates that some should be exempt from the legal wage floor – apprentices, domestic workers (paid mainly in kind), workers in micro and small enterprises, and those in religious denominations, to name a few.
Putting it all together, too low a wage is in the interest of neither workers, nor employers, nor the economy as a whole. And mandating a minimum wage is good economics, good politics, as well as a reasonable morality. There is little reason for our government to dillydally over the issue. But if the law comes to fruition, all those concerned will do well not to get hysterical about it.
Matias Assefa is Economic and Business Analyst based in Addis Ababa. He can be contacted at matias.assefa@gmail.com
