Africa Opinions Uncategorised

Is Covid-19 The Last Nail in The Minimum Wage “Coffin”? What is The Way Forward for Economic Recovery from The Pandemic for Uganda?

Even in good times, minimum wage policy is not easy to enforce. Minimum wage legislation may be good politics but it is questionable whether it is good economics especially in the context of neoliberal economic ideology. It just simply has too many ramifications. It may be precisely for this that the President, in his discretion and after careful consultations, refused to assent to the Minimum Wage Bill that Parliament passed way back in February 2019.

The fact is, setting minimum wage for employees, when employers are free to hire and fire is like trying to plug a hole in a leaking container with many holes! Employers who resist the policy are likely to downsize by firing employees (something definitely not desirable in the context of unemployment); resort to overworking staff they cannot fire; or attempt to shift the extra labor cost onto consumers through higher prices that can ultimately erode the very benefits of the minimum wage legislation.

In a competitive labor market, wages are set by the forces of demand and supply of labor. However, markets work best when there are many players on both sides of the market; employers on the demand side, and workers on the supply side. If there are few employers (oligopsony) and in the extreme case one employer (monopsony), there is a problem. The fewer the employers, the more the power they wield in setting wages. In cases of such asymmetry, there are genuine concerns of labor exploitation. Unions try to counteract this politically through mobilization and wage negotiations. However, pushing for higher wages especially through hostile industrial action can trigger many things including the straining of employer-employee relations with possible loss of productivity and jobs. This has to be done very carefully with consideration of the interests of both sides. So, for now, the Ministry of Labor, Gender and Social Development needs to advise regarding the way forward in the framework of the Minimum Wages Advisory Board and existing laws. The bottom line however, is that no organization can pay more than it makes otherwise it is headed straight for bankruptcy.

The on-going Covid-19 pandemic has reduced business revenues and led to all kinds of reactions from employers including downsizing of staff, suspension of employee contracts and pay-cuts. Under Covid-19, it is clearly preposterous to speak of minimum wage! How can anyone convincingly talk about minimum wage when employers are sacking employees, suspending contracts and offering pay-cuts? So together with the unions, we need to confront the question – is minimum wage still viable or has Covid-19 driven the last nail firmly in the coffin called minimum wage?!

What is the way forward? What kind of policy will trigger and accelerate economic recovery from the shock of the pandemic in Uganda? The first thing to bear in mind is that many businesses have been badly hit by the lockdown; many collapsed altogether. It is therefore critical at this point for the government to intensify conditions that will nurture a rebound in the production sector. This can be done by lowering the cost of doing business and facilitating the recovery process. Specifically, government can lower or suspend taxes, further simplify and reduce the cost of business startups and support business growth through various possible ways. Tax breaks will help businesses recover and new ones, spring up. This will also ultimately expand the tax base in the medium to long-term. With broader tax base, government can recover tax revenue in later years even with lower marginal tax rates.  Lower tax rates are good for the economy, tax compliance and for the people. Rising demand for labor from a vibrant business sector is good for employment and wages. In fact, faster growth in the demand for labor from industry vis-à-vis growth in the labor force itself is the most effective way to grow wages.

Alex Thomas Ijjo, PhD

Department of Economics and Management

Cavendish University Uganda.