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Greedflation, employment and poverty

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The Sri Lankan cabinet has approved a significant 40% increase in the minimum wage, aimed at assisting workers struggling with the high cost of living amidst an ongoing economic recovery from a severe financial crisis that began in early 2022. This crisis, triggered by a sharp decline in foreign exchange reserves, resulted in notable inflation, currency devaluation, and a default on foreign debt. The minimum wage will escalate from 12,500 rupees ($42) to 17,500 rupees, with the added objective of supporting those in poverty.

According to the National Minimum Wage of Workers Act (No. 03 of 2016), the current minimum national salary stands at Rs. 12,500/-. A subcommittee, composed of representatives from trade unions and small to medium-sized businesses, recommended raising this minimum salary to Rs. 17,500/-. The Cabinet of Ministers has sanctioned the proposal to elevate the national minimum salary by Rs. 5,000/-, from Rs. 12,500/- to Rs. 17,500/- (Figure 1). Amendments to the Act are anticipated to implement this change, with the aim of increasing the daily minimum wage from Rs. 500/- to Rs. 700/-. (See Figure 1)


Labour Department statistics show that the monthly average minimum wage in the public sector was at Rs. 34,550 at the end of 2021.

Vajira Ellepola, the Director General of the Employers’ Federation of Ceylon, noted that the increase in the minimum wage didn’t necessarily translate to a rise in the basic salary for many private sector employees. This was because most private sector basic salaries already exceeded the minimum wage threshold.

For instance, if the current minimum wage is Rs. 12,500 and an employee’s basic salary is Rs. 20,000, a rise in the minimum wage to Rs. 17,500 may not automatically lead to a proportional increase in that employee’s basic salary.

According to the Central Bank, the Non-Performing Loan (NPL) ratio in the Household sector has been steadily rising due to the constrained ability of households to repay debts. By June 2023, the NPL ratio for households had increased to 17.7%, a significant jump from the previous year’s 14.1%. The Central Bank’s Financial Stability Review for 2023 highlighted that the proportion of non-arrears loans in the Household sector has been decreasing since early 2022, while arrears loans have been increasing, indicating a continuous decline in credit quality, likely to persist if adverse economic conditions persist.

State Minister of Finance Shehan Semasinghe had mentioned that 22% of the estimated 6.2 million household units had fallen into debt due to the economic crisis. Among these units, 24.3% were urban, 20.9% rural, and 42.8% estate households. He further noted that 60.5% of household units experienced a decrease in income, while 90% saw an increase in expenses due to the economic downturn.

Greedflation

Inflation may not be the only factor increasing the price of consumer goods. There is a noticeable trend where competing manufacturers are raising their prices at varying rates, not just in comparison to each other but also in contrast to the inflation rate.

Greedflation is the concept suggesting that the pursuit of higher corporate profits is adding to the problem of high inflation. This notion has shifted from being a less common viewpoint to becoming widely discussed in Europe and the US over the past year. Similarly, there is ongoing debate about this issue in Australia.

As households struggle with the increasing cost of living, certain large companies are generating record profits. Inflation is cooling in Sri Lanka. The most recent data showed the Headline inflation of March 2024 is 0.9 percent, down significantly from last March 50.3 (Table 1)

Not only are manufacturers adjusting their prices, but various entities throughout the supply chain—including shipping/transporting companies, wholesalers, and retailers—are also updating their pricing strategies accordingly.

While the yearly change in prices has decreased, the overall prices remain elevated due to previous increases. For instance, a carton of 10 large eggs still costs Rs650.00. This demonstrates that low-income households will continue to struggle with the already heightened cost of living. Hence, it is imperative that any increase in the minimum wage is supplemented with additional support measures, rather than being seen as a sole solution.

The true indicator for reducing inflation, according to some economists, is unfortunately tied to increasing unemployment. Now we’re facing the challenging reality that to curb inflation, we need to raise the unemployment rate.

Employment and minimum wages

Some people do not perceive a minimum wage as beneficial. One economic perspective suggests that minimum wages can hinder job creation by causing employers to avoid hiring more expensive labor while enticing more individuals to enter the job market.

Nobel laureate economist George Stigler expressed this viewpoint in 1976, stating that good economists typically do not support protectionist programs or minimum wage laws. However, other economists, such as David Card and Alan Krueger, have contested this notion. Their empirical studies in the 1990s found that increasing the minimum wage does not necessarily result in fewer jobs. Despite this, not all economists agree with Card and Krueger. David Neumark and William Wascher examined the evidence and argued that minimum wages do diminish employment opportunities for less skilled workers, particularly those directly impacted by the minimum wage. Consequently, there is no definitive academic consensus on minimum wages, and there is limited agreement on the conclusions drawn from the research literature.

Poverty and minimum wages

In Sri Lanka, the question arises whether minimum wage policies effectively alleviate poverty. However, research findings on this matter have been conflicting. A 2012 study conducted in New Zealand concluded that minimum wages do not necessarily lift people out of poverty. Similarly, an analysis using Irish data suggested that minimum wages might not be an effective tool for addressing poverty, describing them as “a blunt instrument.” Conversely, a 2021 study in the United States discovered significant positive employment outcomes for single mothers with young children, indicating that minimum wages could serve as a means to reduce child poverty. This issue holds particular significance in Sri Lanka due to the high prevalence of poverty among certain demographic groups.

Conclusions

In conclusion, the approval of a substantial 40% increase in the minimum wage by the Sri Lankan cabinet reflects efforts to alleviate the strain on workers facing the challenges of a recovering economy from a severe financial crisis. Triggered by a sharp decline in foreign exchange reserves, this crisis led to significant inflation, currency devaluation, and a default on foreign debt. The minimum wage rise from 12,500 rupees ($42) to 17,500 rupees aims to support those in poverty, but it may not proportionally affect all sectors due to existing salary structures.

However, the increase in minimum wage alone may not be sufficient to address the overarching issue of inflation. A broader approach, encompassing additional support measures, is necessary to mitigate the impact of the rising cost of living on low-income households. This is particularly crucial considering the steady increase in non-performing loans in the household sector, indicating ongoing financial strain. Furthermore, discussions around “greedflation” highlight the role of corporate profit expansion in exacerbating inflation, further underscoring the need for comprehensive policy responses.

In navigating these economic challenges, it is imperative to consider the interconnected nature of various factors, such as employment, poverty alleviation, and interest rates. While minimum wage policies may have differing effects on employment and poverty reduction, there is no definitive consensus, highlighting the complexity of the issue. Additionally, the management of interest rates and their impact on investors further underscores the need for careful consideration and coordination of monetary policies.

Ultimately, addressing these economic challenges requires a holistic approach that considers the diverse needs of different sectors of society and balances economic growth with social welfare objectives. It is essential for policymakers to remain vigilant and responsive to evolving economic conditions to ensure sustainable and inclusive development.

(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT University, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for. He can be contacted at saliya.a@slit.lk and www.researcher.com)

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