We are coming close to the time when the increase in the Colombian minimum wage for 2008 is decided. Every year, the raise in the minimum wage is negotiated within the “Permanent Commission for the Negotiation of Wage and Labor Policies”. The negotiation is supposed to take into account inflation and productivity growth to set the new minimum wage. Labor unions, groups of employers, and the government are represented in the Commission. The negotiation faces all the difficulties inherent to collegial decisions where the participants have conflicting interests. As an added difficulty for this year, the government has suggested differential raises for different sectors. The idea is that employers in sectors with lower productivity differentials, and those hardest hit by the peso appreciation, be protected via lower increases of the minimum wage. This comes in contrast with the unified minimum wage the country has had since 1984.
There are several reasons why adopting this proposal seems inconvenient. A first problem in the negotiation of differential raises of the minimum wage lies in the calculation of the inflation rate and productivity growth that are relevant for each sector. These measures are subject to intense debate at the aggregate level; they would probably be even more controversial if finer detail is required.
The adverse effect of distorted measurement at the sector level is likely to be exacerbated by structural differences across sectors. On a technical point, one of the problems with the usual productivity measures is that they interpret growth in sales as growth in productivity. Sectors with relatively high growth in prices (probably associated with higher costs and thus less efficiency of the sector), and resulting high growth in sales, could be wrongly seen as exhibiting high productivity growth. As a consequence, they would face higher than appropriate raises in the minimum wage, probably resulting in a contraction of employment. Since increases in costs and prices may persistently occur in the same sectors, the distortions introduced by measurement error are likely to deepen as time goes.
An even more serious difficulty has to do with different levels of political power across sectors. First, the relative bargaining power of workers, vis a vis employers, varies from sector to sector. This would result in differences in minimum wages that have nothing to do with productivity growth or variability in the shocks faced by sectors. Furthermore, employers in sectors with more lobbying capabilities will be better able to convince the government they are among the disadvantaged. They would likely obtain lower minimum wage increases, solely as a result of their lobbying activities.
Although one could argue that other countries have differential minimum wages without this being “that” damaging, the argument needs to be looked at carefully. Take, for instance, the case of Mexico. Minimum wages differ across three geographical regions, and within each region they differ across sectors (around 80 sectors in each case), resulting in hundreds of different minimum wages. A quick look at the 2000-2006 press releases by the agency that sets the Mexican minimum wages, however, reveals that in each region the annual increase has been the same across all sectors. The sectoral differences in the level of minimum wages correspond to a careful study of differences in workers’ education across sectors, and they remain constant over time (that is, there are no differential increases). Although the convenience of setting differences in levels is also debatable, this system is less damaging than setting differential annual increases. At least there is no accumulation of distortions over time, and the differences are decided through extended discussions fed by technical analyses, rather than hasted annual negotiations. Still, someone could note there are differences in wages across regions. But the same press releases assert that differential increases across regions during the 2000’s have been chosen so as to make the three regional minimum wages converge to the same!
Having wages that appropriately reflect the productivity of each worker-job match is indeed desirable. But moving in the direction of setting every single type of wage in a centralized manner will not help in this purpose. It will rather introduce the political and technical distortions mentioned above. Moreover, it will leave the country without what has become the reference for many other prices. The fine for parking in a forbidden spot is 15 daily minimum wages. Maybe I’ll get lucky and the minimum wage for university workers in Bogota is set sufficiently low that next year I can go around parking anywhere.