Africa-Press – Mauritius. 2023 will end on a positive note for thousands of low-income earners, who will see their monthly salary jump from Rs 15,000 currently to Rs 18,500 as from January 2024.
Middle- and high-income earners will receive a smaller consolation of Rs 2,000 as salary compensation. The new minimum wage and the announcement of the quantum of the 2024 salary compensation came within a week of each other and have been diversely commented.
Many trade unionists were surprised by the generosity of the government. Although they had pushed for a ‘compensation salariale’ of Rs 1,500 to Rs 2,000, they did so to set the anchor high in the negotiations, as they usually do.
Little did they expect the government to agree in toto to their demands. Other observers are more critical of the salary adjustments, arguing that the government is playing politics with wages, with potentially drastic economic consequences in the future.
The private sector is worried about the impact of the salary increases on jobs and on the viability of smaller businesses. This article explains the economics of the minimum wage and salary compensation through a historical perspective, assesses the likely impacts of the recent salary hikes, and discusses their political-economy ramifications.
Evolution of the minimum wage
The national minimum wage (NMW) came into force in January 2018 following the report of the National Wage Consultative Council (NWCC), which was established by a 2016 Act to make recommendations thereupon.
Initially, the NMW was set at Rs 9,000: Employers in non-export-oriented enterprises (non-EOE) would pay Rs 8500 while the EOE sector would pay Rs 8,140, with the government topping up the employers’ shares by Rs 500 and Rs 860, respectively.
Over the years, the NMW has been adjusted through annual cost-of-living allowances (or ‘compensation salariale’). On 1 January 2023, it stood at Rs 12,075: Rs 11,575 payable by employers in the non-EOE sector and Rs 10,875 payable by EOEs, with the balance chipped in by the government.
The 2023-24 Budget raised the government’s share so that employees across the board would be guaranteed a minimum monthly income of Rs 15,000. That meant that the government would effectively pay Rs 3,425 to employees in the non-EOE sector and Rs 4,125 to employees in the EOE sector, of which Rs 2,000 would be out of the CSG.
The latest announcement last week does away with the differentiation between the EOE and non-EOE sectors, imposing the same NMW of Rs 15,000 across all sectors, which, with the CSG allowance of Rs 2,000 and the ‘compensation salariale’ of Rs 1,500 takes the ‘revenu minimum guaranti’ to Rs 18,500.
The economics of the minimum wage
Minimum wages are set above the market wage to ensure a decent income – or living wage – to workers. There are accounts of some categories of workers being paid as low as Rs 1,500 per month before the NMW kicked in in January 2018.
Basic economic theory predicts that the legislation of a minimum wage will initially disrupt the labour market and cause unemployment in the short term. Consider the diagram below.
If we view labour as a commodity (or a service), then the wage rate is the price of labour, and we can explain the determination of this price like most other prices, that is, in terms of the market forces of demand and supply.
The demand for labour comes from employers and is a derived demand. That is, it is ‘derived’ from the demand for the final good or service that the firm produces.
Since firms are profit-seeking, they will want to hire more workers when it is cheaper to do so, that is, when the wage rate is low. The demand-for-labour curve is therefore downward-sloping.
The supply of labour comes from the working population. Each unemployed person has a ‘reservation wage’ below which he or she will not be willing to take up a job.
But as wages rise past the reservation wage, the jobless may find it economically attractive to join the labour market, and the labour supply will increase.
The labour supply curve is thus upward-sloping: as the wage rate rises, more people will be willing to work. In the absence of government intervention, the labour market will clear, that is, labour demand will equal labour supply, at wage rate W0. Note that this point is a full-employment equilibrium: at wage rate W0, every person who sought a job is gainfully employed.
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