The National Minimum Wage is a hot topic. One which induces ‘facts’, opinions and emotions from all sides — even in the Maldives. While the President Solih Administration’s pledge of setting a minimum wage has taken a back seat amidst the ongoing pandemic, its implementation deadline looms large.
What is a National Minimum Wage?
Theoretically, a national minimum wage is a ‘floor price’ — which means once the minimum wage is set an employer is required to pay their employees the defined minimum amount as remuneration for work over a given period. Defining a minimum wage seeks to address the problem of poverty pay — the condition where earnings from paid work do not result in a living wage and fails to push people out of poverty. This is why the principle of minimum wage is based on the concept of social justice — that workers should be protected from excessively low wages.
The local landscape
The 2019 publication titled ‘Establishing a Minimum Wage in the Maldives’, published by the International Labour Organisation (ILO) Country Office for Sri Lanka and the Maldives reports statistics in relation to setting a National Minimum Wage for the Maldives. According to the ILO study the working age population of the Maldives in 2016 was at 263,311; of which 151,706 were in the labour force. Upon closer examination, 142,422 were employed and a total of 9,284 were unemployed. Unsurprisingly, nearly 70 percent of the working population was reported to be under the age of 45. It was also reported that although the retirement age in the Maldives is 65, over 5,000 people aged 65 and above continued to work in the labour market.
Remuneration wise in 2016, wage earners were paid on average MVR9,014 a month. The publication further reported that approximately 23 percent of workers are currently receiving wages and salaries below the threshold of MVR 5,000 and the monthly wage gap is approximately MVR1,187 per worker. What this means is, workers falling under this threshold are presently earning a little over MVR3,800 per month. Similarly, when the minimum wage threshold is increased from 5,500 up to 8,000, the worker wage gap also increases. So overall, irrespective of the minimum threshold set, workers in the Maldivian labour market are currently earning less. Hence, one of the recommendations in the report was that the monthly minimum wage of the Maldives had to fall within the range of MVR 6,008 and MVR 6,544. The Minimum Wage Advisory Board had also initially recommended that an overall minimum wage of MVR 6,400 be set.
Why have workers not been paid a decent wage?
Without a National Minimum Wage, employers have autonomy. They set their own base pay, which in many circumstance does not reflect the community’s socioeconomic landscape.
There are other, and varied, reasons for the low pay, though it eventually boils down to labour market failures. One such failure is the enactment of barriers to entry into the labour market. Some of these barriers are enacted voluntarily by organisations — through discriminatory hiring practices, relationship-based recruitment, etc. — while others are embedded in culture and society — beuraucratic application processes, etc. — resulting in involuntary barriers. The outcomes of this failure means that human resources are underutilised while employers have an upper hand in the selection process and remuneration design.
A significant cause of low pay for Maldivian workers is the lack of bargaining power on the part of the workers. When trade unions are not legally recognised, employers have an unfair advantage in negotiations and decision making, whereby they can adopt a ‘take it or leave it’ attitude. While various specialist associations, such as those of teachers or hospitality workers, are currently collectively raising their voices, the extent of their effectiveness, without any supporting legal framework, is questionable.
Another labour market failure is the inward migration of labour from low-pay countries driving down wages. In the Maldivian context, this is prevalent mainly in limited sectors and jobs.
This is by no means an exhaustive list, but for the purpose of this writing, this can be considered an adequate average.
Who will benefit?
Specialised or skilled workers who are currently paid over the proposed minimum wage will unlikely see a difference in their take home pay However, the group of workers who will experience a rise in pay will be the lesser experienced, lesser educated and lesser trained workers with earnings below the set National Minimum Wage — lifting them out of poverty pay but also potentially increasing the opportunity for more experience and better education and training while on the job.
Is a National Minimum Wage the answer?
Seen purely from a monetary perspective — absolutely.
While ‘money can’t buy happiness’ it can certainly buy goods and services which can bring happiness to individuals and families. The primary argument in favour of establishing a minimum wage is that higher earnings will improve the overall standard of living. It can lift up low paid workers from poverty and enable a more decent, respectable life than where they are at the moment.
A direct benefit of this scenario also being that it puts more discretionary money into the hands of workers. This is money which workers will inject back into the economy through increased spending, as consumer spending typically increases along with wages. This injection will flow to local businesses and in turn boost the economic growth of communities. Achieving greater equity with a more just distribution of income between high and low workers can also bring more stability to the labour market.
Employers are also likely to see benefits. Many reports have cited the intangible benefits for both companies and employees due to an establishment or increase of a National Minimum Wage. Employee morale and work ethic increase when employees believe they are paid a fair wage. Economists have also linked higher wages to better physical and mental health, leading to higher productivity. Happier, more motivated employees translate to more tangible benefits such as increased employee retention, which reduces hiring & training costs, while also inducing reduction in wastage, increased employee commitment and reduced turnover.
According to a 2018 report on Amazon published by the Harvard Business Review (HBR), research found that pay increments enhanced productivity of employees for two major reasons. The first reason was ‘efficiency’ — where workers are likely to be more efficient at their current roles due to the motivation boost. The second reason was ‘reciprocity’ — workers reciprocate or give back to the company by being more efficient. The flipside is, a National Minimum Wage does not differentiate between those who are efficient and those who are not, or those who shirk at work. This is addressed by smarter human resource management, and interventions, or to go for a pay-for-performance strategy built on the minimum wage.
There can be possible drawbacks
A question the HBR study could raise is, “How long will the workers continue to ‘show’ their enthusiasm with regards to the pay hike?”
Additionally, money is the biggest motivator for people to work — out of necessity or choice. Going by the basic economics of demand and supply, the higher the pay, the higher the number of people willing to supply labour. Reflecting back on the working age population of the Maldives, as reported in the 2019 ILO Report, the higher the pay, the more, from those 263,311, will be incentivised to supply their skill, and knowledge portfolio, and thus actively seek work. As the minimum wage is a floor price, this scenario can then likely create a surplus. A surplus, in the labour market, means unemployment.
Similarly, if the minimum wage is set too high or increased too much, it may result in an unexpectedly large cost associated with labour that employers must pay, thereby substantially increasing operating expenses for companies. In this scenario, there is one of two likely paths businesses will choose in order to cover their increased labour costs. Businesses might increase the prices of products and services to cover their increased costs; passing this on to consumers which in turn could trigger price inflation and ultimately even hurt exports. Alternatively businesses might be forced to cut jobs to maintain profitability. Ultimately, an increased price and a general increase in the cost of living could essentially negate any advantages gained by workers through the pay hike.
Compliance will also play a part when it comes to the national minimum wage. A minimum wage set too high could provoke low levels of compliance, thereby weakening the objective of the minimum wage policy. Similarly, if the minimum wage is set too low, it is unlikely the overall consumption expenditure of households will increase to a level the will benefit the economy.
In July 2020, it was reported that a motion was submitted to Parliament proposing an implementation of a varied minimum wage across different sectors to be set between MVR4,000 to MVR8,500. While different stakeholders have had differing opinions on the wage level, what is important is to remind ourselves why we need a minimum wage. As the ILO has put it, the purpose of minimum wages is to protect workers against unduly low pay. However, fair caution has been put forth by the organisation which we must also consider deeply; the ILO has stated that minimum wage systems should not be seen, or used, in isolation as a blanket ‘savior of employees’, rather it should be designed to supplement, and reinforce, other social and employment policies supporting both employers and employees.
If the focus remains on protecting workers from excessively low wages whereby lifting them up from below the poverty line, it will undoubtedly translate to a healthier economy and a happier, more productive, people. However proper consideration, direct & supporting legislation and periodic review will be key if the nation is to reap the optimum benefits of a national minimum wage.