An arbitrary approach to minimum wage

Political expediency and rushed judgments undermine proposed wage hikes

Reading Time: 8 minutes

Few would disagree that the minimum wage in Lebanon needs to increase to help the poorest socio-economic segment of the population better meet the rising cost of living. And while raising the minimum wage in any country would have hints of populist politics involved, the more well-functioning governments around the world would also base their decision, at least in part, on some sort of economic analysis and wider strategy for greater general prosperity and growth. Lebanon, unfortunately, is not one of these well-functioning places. 

As Executive went to print the minimum wage stood at LL500,000 ($330) per month, a level it reached after being hiked by LL200,000 ($132) in 2008; before that the last time the government addressed the minimum wage was in 1996. Last month the cabinet again decided to raise the minimum wage after a last minute deal was struck with the General Labor Confederation (GLC), the country’s largest collective union of workers, on the eve of an October 12 strike where they planned to demand that the minimum wage be raised 250 percent, to LL1,250,000 ($830).

“It’s normal that the unions and syndicates ask for more to get less,” said Jad Chaaban, acting president of the Lebanese Economics Association (LEA).

And less was what they got. In the end the parties agreed to raise the minimum wage by 40 percent, to LL700,000 ($464) per month, for every worker currently earning less than LL1,000,000 ($663) each month. For those making between LL1,000,000 and LL1,800,000 ($1,194) per month, salaries would increase by LL300,000 ($199), as well as raising the transportation allowance from LL8,000 ($5) per day to LL10,000 ($6) and raising the education allowance cap to LL1,500,000 ($995). The adjustments will not be retroactive and are slated to come into effect for the private sector when they are published in the Official Gazette, something that had yet to happen as Executive went to print. For the public sector, any adjustment will require a law to be passed by parliament.

While the decree averted a general strike that Finance Minister Mohamad Safadi claimed would have been used by a “fifth column” to spur riots in the country, everyone from the labor unions to private sector committees cried foul as soon as it was announced. The teachers union held a nation-wide strike on October 19, declaring the decree “humiliating”, stating it was not enough and deriding the upper-end limit of the wage increase. The Secretariat General of Catholic Schools also lashed out from the employers’ side, stating that tuition would be increased by LL1,000,000 ($663) per student if the measure came into effect. Private sector leaders condemned the decision, saying it was not based on economic analysis, declaring they would refuse to apply it. Instead they would wage an “economic protest”, according to Adnan Kassar, head of the Economic Committees, the largest umbrella association of private sector committees. He added, “The problem is not minimum wage… it’s economic policy.”

No growth, no salary

Put into the context of low growth, the proposed increase in minimum wage would spur a period of stagflation (high inflation and unemployment coupled with low growth), according to Neemat Frem, president of the Association of Lebanese Industrialists (ALI) and chief executive officer at Indevco Group, one of Lebanon’s largest industrial employers. While Frem admits the changes would impact only 5 percent of the workers at his company, he says the effects on industrial production, a naturally labor intensive sector, would be “a disaster”.

“In this low growth environment where we are staying for a while, businesses will have to lay off people,” said Nasib Ghobril, head of economic research and analysis at Byblos Bank group.

Charles Arbid, president of the Lebanese Franchise Association (LFA) and owner of the Rectangle Jaune brand, estimated that his costs would increase by 15 to 20 percent as a result of the plans. “The premier effect of this decision will be on the competitive ability of Lebanese production and competitive advantage and the internal market movement that affects the situation of organizations,” he said.

The effect on different sectors is not yet clear as the government still does not have the administrative capability to monitor wage levels, due mainly to a lack of comprehensive research.

“First of all there is no labor survey so there is no basis to request this kind of hike,” said Ghobril. “Then you need an employer survey, an expenditure survey, a new household survey, labor market conditions and wage distribution, none of which are available and from what is available, none have been updated. You cannot automatically ask for something like this when businesses have high operating costs and the economy is slowing down,” he said, stating that a minimum wage of $500 would be “reasonable” if operating costs on businesses, such as electricity and telecommunications, were reduced by the government.

The only indication of the cost of raising the minimum wage on businesses presently is a preliminary study released in September by the actuarial firm Muhanna & Co. The study is based on wage statistics from the National Social Security Fund and “many other databases” according to the company’s managing director, Ibrahim Muhanna. With these statistics its calculations are for a minimum wage increase to LL1,250,000 — what the GLC was initially requesting. That, the report states, would increase average salaries in Lebanon 52 percent, while in the educational and health sectors operating costs — of which labor accounts for about half of the total — would increase as much as 36 percent.

Given that the 250 percent rise in the minimum wage demanded by the GLC was slashed to 40 percent, these kinds of numbers will not become a reality for businesses any time soon. Indeed, Muhanna’s study advises wages be benchmarked to incomes of those who live around the poverty line ($4 per day) and thus reached a conclusion that minimum wage should be raised to around $500 per month, along with subsidies and reforms in water, electricity and public transport, somewhat in line with what was decided by the government.

While the proposed increase may, therefore, be in line with what several experts believe to be a fair wage level, the matter of timing seems to have been disregarded by policy-makers. “Raising the minimum wage reasonably and gradually is fine, and it should be planned ahead,” said Muhanna. “It’s these offshoot raises that create a problem. People don’t have budgets for a 40 percent rise. This is not acceptable.”

No growth, loads of bloat

Last month the finance minister announced that the first six months of the year saw zero economic growth, while his expectation for the end of the year was a figure of around 2 percent. Other organizations have been less optimistic, with growth estimates from the International Monetary Fund and the Economist Intelligence Unit of 1.5 percent and 1.3 percent, respectively. Next year many, including the finance minister, predict that growth will rebound to around 4 percent. Where that recovery will come from remains a mystery to many such as Nicolas Chammas, president of the Beirut Traders Association.

“On what basis do they predict growth in 2012? We have to accept that we are in a recession. When you are increasing salaries in a recession you are going to have stagflation, you are going to lose jobs and the non-salary wage earners are going to be cornered which will create political instability,” said Frem. “This is a classical formula to go to hell.”

Indeed, any pay raise will not affect those who are self-employed or work in the informal sector. According to a leaked World Bank labor study obtained by Executive, the informal sector, composed of  “self-employed low-skilled workers” and “informal wage employees” make up 35 percent of the workforce and are automatically ineligible for the wage rise. Another 20 percent of the labor force is categorized as “self-employed high skilled workers,” 11 percent unemployed (versus the 9.2 percent figure posited by the government) and 5 percent classified as employers; none of whom will see any benefit from increased minimum wage. That leaves 29 percent of the workforce — in both the public and private sectors — that would directly benefit.

In the private sector double bookkeeping is rampant because companies have an interest in under-reporting wages so as not to pay more in social security contributions, according to Chaaban. Muhanna believes that if the minimum wage hike is passed as it is, this dodgy bookkeeping will “definitely increase,” as employers refuse to implement the increase.

The main beneficiaries of the increase would thus be workers in Lebanon’s public sector, bloated from its abuse by political leaders as a tool for patronage. This will cost the government at least another $700 million, according to the finance minister last month.

“Today our deficit is around 10 percent of GDP… If all the taxes [in the new budget proposal] are voted for, which it doesn’t seem that they will be, with the salary increase we will go to 12 percent,” said ALI’s Frem, “This is completely crazy.”

The increase in wages in the public sector would raise the total deficit from 29 percent of expenditure to at least 33 percent, supposing that all the increased taxes contained in the 2012 budget proposal are passed by both the cabinet and the parliament, something that has no recent historical precedent. 

“There are dozens of empty posts in the government and instead of consolidating organizational structures, like the private sector does to recruit less, [politicians] are competing amongst each other to recruit their own people,” said Ghobril. “There is no political will to tackle things seriously, [the government] goes straight to taxation and minimum wage and populist approaches.”

Pricey plans

What must also be taken into account is that the latest budget proposal seeks to increase value added tax (VAT) from 10 percent to 12 percent.

“The major problem here is when you increase the indirect tax that is borne by everyone, most probably the effect of the wage increase is wiped out,” said Chaaban. “The solution is to increase taxes on the richest bracket but the current political class will not do it because they don’t have an interest in doing so. They are not going to make a law to tax themselves.”

Increases in wages and VAT automatically also have an inflationary effect, which would eat into growth prospects. The 2012 proposed budget predicts economic expansion of 4 percent with an inflation rate of 5 percent, but that does not factor in the inflationary impact of the wage increase.

“Things will become more expensive, people will consume less and government revenues from VAT will decrease with time,” said Ghobril.

Time to talk

The unscientific manner in which the minimum wage decision was made has prompted many to urge cooler heads to prevail. The Economic Committees stress that they want to open up a dialogue with the government while at the same time threatening to go to the Shura Council, Lebanon’s highest court, to recall the minimum wage decision.

Chammas argues the dialogue should focus on how to spur economic growth and how to increase government support to the private sector in the form of subsidies. The committees countered the government’s minimum wage decision by stating they are willing to raise the minimum wage by the 16 percent official inflation rate published by the Central Administration for Statistics, bringing the total wage level to LL580,000 ($385). That is not likely to appease the labor unions but Chammas also stated that he would be in favor of raising the minimum wage level every year based on inflation.  

For the government’s part, Finance Minister Safadi stated last month there are three conditions to raising the minimum wage: that it is not eaten up by inflation, subsidies must be given to “certain products for certain needy people” and a long-awaited competition law dealing with monopolistic behavior must be issued by parliament.

That, along with exclusive agencies, is something that many business owners who operate in such an environment will be loathe to accept. Chammas, who is the exclusive agent for the Chanel brand, does not believe that businesses should compete with each other over the same brand but rather between brands, as this allows for economies of scale.

Others are more willing to compromise given that they are asking the government to completely rethink their economic policy before raising wages.

“We can’t just think about wages, we need to think about the chronic problems of the Lebanese economy, our competitiveness; we want more than a complete economic policy; we want a new social contract,” said the LFA’s Arbid. “We need all the pending laws such as this to be issued and implemented. When we see that there is seriousness in the way we discuss and an intent to reform the laws, then industry will accommodate and we will start putting things back on the right track.”

If government does accept the private sector’s proposal in principle there will need to be a process by which those who speak on behalf of laborers and employers are selected, not to mention the input of economists. Such an initiative had yet to be announced as Executive went to print and the government itself was split over the issue of funding the Special Tribunal for Lebanon, much less discussing wages. The legal battle over the wage issue could take months and so could the political squabbling over the budget in both cabinet and parliament, meaning this issue is not likely to be resolved imminently.

“I want to see a day in Lebanon where politics is at the service of economics and not the other way around,” said Frem. “It just so happens that today the politicians are using very dangerous tools of economic fundamentals in their political games. And this is nothing less than collective suicide.”