A compulsory and indiscriminate raise in salaries will only result in reduced employment or a broadening of the informal sector. In effect, worse poverty for the working masses of Bolivia.
PRESIDENT EVO MORALES of Bolivia recently announced that his government will have to raise the existing minimum wage "by at least 50 percent," adding that ways are being studied to boost that raise to no less than 100 percent. At present, the minimum wage in that country is 440 bolivianos, about 55 American dollars, a figure that's quite low when compared with the minimum salary in other South American countries. The possibility of doubling the current wage depends, according to Morales, on a judicial ruling that would force private oil companies to pay $40 million in back taxes, thus giving the government the necessary funds to cover the wage increase.
Although 100-percent wage increases are not at all frequent worldwide, the increase is not enough for the labor unions. James Solares, the executive secretary of the Bolivian Labor Federation, has expressed dissatisfaction with the announced measure. He has insisted that the president must make good on his campaign promise to hike wages up to 1,500 bolivianos, a 241 percent increase over current wages.
NATURALLY, ALL OF THIS has caused disquiet in the private sector and attracted criticism from several independent analysts because many objections can be raised against government mandated wage increases. In the first place, mandated decisions affect the economy as a whole without regard to the differences in productivity that exist among the various regions and areas of activity. For example, whereas in most large Bolivian companies the workers usually earn salaries much higher than the minimum wage, the same does not occur in many mid-size and small enterprises, in the rural regions, or in the domestic service sector, which, according to Bolivian law, is also affected by the decree.
Therefore, a compulsory and indiscriminate raise in salaries can only produce two social consequences: either a reduction in total employment because the less productive enterprises will be unable to continue to hire the same number of employees they now have and will have to lay off some workers (or, in the worst of cases, to shut down operations), or a broadening of the so-called informal sector, that is, of the labor pool composed of those who cannot comply with the existing labor and tax laws and are forced to work outside the area regulated by law. Both possibilities, which in practice usually combine in different ways, have negative social implications because they lead to the stagnation of the economy and its fragmentation into two different sectors.
Secondly, the danger exists — as pointed out by economists of every bent — that the government will be unable to properly fulfill its promises, even if the oil companies are forced to pay the back taxes. The money the government is counting on to cover the larger wage disbursements in the future will enter the fiscal coffers only once, creating uncertainty about additional sources to cover these wages in the future. The most probable consequence is that, pressed by its new commitments, the government will be obliged to issue more currency and provoke a return to the feared inflation that ravaged Bolivia in the 1980s.
BUT THE PRINCIPAL objection is not so much the measure's arbitrariness or its possible inflationary consequences - problems that by themselves are quite serious - but the fundamental error hidden behind this voluntarist view of the economy. If the wages can be fixed by decree at whatever value the government wishes, why not raise them once and for all to the value proposed by the Labor Central? Or, better yet, why not bring them on par with the wages earned by workers in Argentina or Brazil, or even Germany and the United States? If you want to improve in one blow the standard of living of the working masses, why stop halfway?
If we press the issue to that level, we shall be told, in one way or another, that our proposals are impossible, that the economy cannot afford them, that they would immediately create insoluble problems that would lead to a profound economic crisis, characterized by high inflation and a recession that would dash all of the president's good intentions. In fact, any type of mandated wage increase, large or small, will have a negative economic impact because wages need to respond to the real level of an economy's productivity, and decrees can do nothing to change this fact. A leader, like Evo Morales, who falls into the populist temptation to hike wages is merely incubating greater economic difficulties for all and, in effect, worse poverty for the working masses.
Carlos Sabino is an adjunct fellow with The Independent Institute, a fellow of the Francisco Marroquín Foundation in Guatemala, a director at CEDICE, a public policy institute in Venezuela, and the author of many books on development. This column was republished with permission from The Independent Institute.
Originally published April 24, 2006