A very wise economist once taught me that if all that it took to eliminate poverty amongst working people was to pass good laws then they would have been passed by good men and women a long time ago. If we want to raise the standard of living of those at the very bottom of the nation’s wage structure then the solution lies is simply raising their wages and their poverty would go away. Right? Well many economists would argue that if you raise the minimum wage significantly then workers will be simply be laid off and replaced by machines or the businesses would simply close. In some cases this is absolutely true. In many businesses the cost of wages paid to workers on or close to the minimum wage is such a low proportion of total cost that it frankly almost does not matter. But an increase in minimum wages will also result in what economists call changes in wage relativities ie. the wage of the person at the bottom compared to those above that really is the main effect of raising minimum wages.┬á┬á
Falling Real Minimum wages
Why do countries like Botswana have a minimum wage? It is for reasons of fairness and justice. As those at the bottom of the wage structure usually have no unions and no economic power to negotiate a living wage with their employers the only institution that can protect them from an exploitative wage is the state. While there is a conflict between the competing pressures on government of protecting the poor from exploitation and not leaving business uncompetitive Botswana has done poorly in terms of protecting the wages of┬á the weakest workers. Between 1993 and 2014 the minimum wage went up for most of the categories ( excluding agricultural workers , domestic workers etc) from P1.25 to P4.50/hr.
If however, you are a domestic service worker the minimum wage in 2014 was┬á P2.5/ hr or P20 per day. This is slightly higher than the global level of absolute poverty of $1.25 (P12.5) per day but not by much.┬á But when you look at what has happened to┬á the minimum wage after you take into account inflation, the so-called ‘real minimum wage’ then the worker at the bottom is much worse than in 1993 and he or she can buy much less. It would take an increase of approximately P1.40 per hour just to get the people on minimum wages back to where they were 20 years ago. The whole world has become more unfair and more unjust than twenty years ago and Botswana is certainly no exception.
When I spoke to one senior government economist about this he said the reason is that during the recession that started in 2008 the government did not want to see more people lose their jobs so it capped minimum wages right up until 2012 when it began to note the obvious fact minimum wages had fallen massively in real terms after the 7-10%┬á inflation of this period . This meant a very substantial fall in real living standards of the poor during this time was evident. The real minim wage in 2013 was some 28% below the 1993 level after taking into account inflation. If the low minimum wage policy had been associated with a period of rapid employment growth then the policy may be understandable and perhaps forgivable but this has certainly not been the case. Employment has been pretty much stagnant between 2009 and the end of 2013 with 390,00 employed at the beginning of the period┬á and 399,000 at the end.┬á Economists who defend the low minimum wage policy argue that the results would have been worse if they had allowed minimum wage to rise.
But how does the person on minimum wage actually compare with the average Motswana? It would not be quite so bad if everyone were suffering and all earnings were falling after taking into account inflation. But this is not the case. The average Motswana who is in paid employment was 34% better off in 2013 than in 1993 in terms of real cash earnings after taking into account inflation. So in other words while the average Motswana was better off over 20 years the people at the bottom of the wage scale became considerably worse off. What this means is the ratio┬á of the minimum wage ( when multiplied by a hypothetical 176hours of work per month) to the average monthly income┬á has been falling dramatically and so Botswana is becoming much more unequal. In 1993 the minimum wage would have given you a monthly┬á pay packet of P220 whereas the average citizen was making P740 in terms of average monthly earnings. In other words the minimum wage was some 30% of the average.
Fast forward to 2013 and the minimum wage would have earned you a monthly pay packet of approximately of P792 as compared to the average citizen who was making cash earnings of P5,009. In other words by 2013 the minimum wage had fallen to16% of the average or just over half what it was in 1993. By this standard┬á Botswana has become much more unfair and this really needs to be resolved for the most important economic reason.
By any international standards Botswana has one of the lowest minimum wages in the world when compared to the average income. When comparing the minimum wage as a percentage of GDP/capita, a common measure of average income, Botswana comes out as one of the lowest┬á amongst the 192 members.
(http://en.wikipedia.org/wiki/List_of_minimum_wages_by_country). Only four or five countries like Kuwait where the minimum wage only applies to foreigners or Uganda which is a least developed country have a lower ratio of minimum wage to average income than Botswana.
What sort of minimum wage policy in Botswana ?
Some economists will tell you that you will get rich if you work hard and save and yes while it is important the most important factor in assuring the prosperity of a nation is peace, order and good government so that the citizen and business can thrive. This sort of policy induced inequality harms Botswana because it undermines the basis of social cohesion and undermines the stability of the nation. To its credit the government has already started moving in the right direction slowly by raising minimum wages since 2012 but this is just not enough. If government is modest in its objectives a P1.40 increase in minimum wages is needed just to return the poorest workers to the 1993 levels of purchasing power. If the government wanted to maintain the same ratio of the minimum to average earnings as existed in 1993 the minimum wage would have to increase to about P9/hour.
Clearly these sorts of increases in one shot would result in unemployment. They need to be introduced with time to allow the private sector to adjust where the sector uses large numbers of unskilled workers who are paid wages that are close to the minimum wage. But the government equally must be seen to recognize that we have a problem that undermines social cohesion and┬á the peace of the nation. This it must do publicly.
In those industries where there are many workers who are close to the minimum wage and would be effected by an increase such as in diamond cutting which competes directly with India the government needs to help the union and the employers introduce productivity bargaining and move the entire sector to a tax free export processing zone as is the case in Namibia. (Almost no diamond cutting firms pay corporate taxes so little would be lost in terms of government revenue).
Neither┬á charity nor good minimum wages … just good jobs!
In the end though the condition of the poor in the country can only be alleviated by sustained economic growth. Minimum wages must protect the weakest in society and the evidence is that they have failed to do so in Botswana which, according to international measures ranks amongst the most unequal nations on earth. In the end though, neither acts of charity nor good minimum wage will help the poor. Workers the world over know that it is good, productive and well paid jobs ┬áthat is the only thing that will eventually drag them out of poverty. And in this we have failed the most.
These are the views of Professor Roman Grynberg and not necessarily those of any institution to which he may be affiliated.