Differential minimum wages in Colombia?

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.

12 Responses to "Differential minimum wages in Colombia?"

  1. ewulf   November 24, 2007 at 5:01 pm

    Very much of the literature about minimum wage impact on employment and welfare,is based only on the economic efficiency point of view.However,the real issue lies within society´s preferences ,between either income or employment.Most of the time, special interest groups (labor union)capabilities for lobbying,(lower transaction cost than society ability to organize itself )allow them to make that decisions on society behalf,but unfortunately they do not make it right.They prefer income ,(high minimum wage)whereas society might prefer employment(middle range,productivity based minimum wage). Therefore,any progress on this discussion, will be possible only once those preferences are included into the analysis.This means that it should be set an optimal level for minimum wage,the one which mimimizes the losses for society, and at the same time it maximize the gains for special interest group.In other words, minimum wage analysis should shift from the normative focus, toward a positive one.Is it possible to find that optimal minimum wage ?. Productivity is just one side of the coin.

  2. Marcela Eslava   December 7, 2007 at 2:40 pm

    I very much agree with the view that theory needs to move in the direction of taking into account the institutional features of minimum wage determination. Little can be said without consideration of these issues, as, at least in many countries, the minimum wage is far from being set by a benevolent central planner. One additional challenge for theory is including these considerations in a way that can be general enough to illuminate the discussion in different countries and contexts, rather than a specific setting. To give just one example, the Colombian case seems quite different to the one the reader has in mind: labor unions are not very strong, and one of the problems of fractionalizing negotiations is precisely that in many sectors workers would be basically unrepresented because they lack organization.

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