These are the pros and cons of raising the minimum wage

The debate around the minimum wage always generates controversy. How much must be raised to benefit workers and the economy?

The minimum wage is an amount of money established by the government of each country, which must be paid to a worker for his work in a working day. This figure is stipulated according to a measure considered necessary to cover the basic needs of workers, taking into account the economic situation of each nation. Its creation was a long social struggle to prevent the abuses that employers had on their employees, giving them a decent payment in compensation for the work done.

Leer en español: ¡Increíble! Estos son los pros y los contras de subir el salario mínimo

With the passage of time, the minimum wage has not been exempt from the liberalizing logic of the economy, so it has entered into an arduous discussion about the different impacts of defining what is the "subsistence limit" for workers, without this affecting the finances of the companies and their owners, and in turn the economy of their respective countries.

In Latin America this discussion has been a relevant issue, since the economic inequalities of the region affect millions of workers and their families. According to the Global Wage Report 2016/17 of the International Labor Organization, the region has one of the lowest rates of growth of the minimum wage in the world. The developing countries of Asia and the Pacific have experienced a very different situation, where there has been an increase in the minimum wage, highlighting China as the main contributor to the region, and globally, on the subject.

In contrast to what is thought, the excessive increase of the minimum wage is detrimental to the economy of the country, affecting both employees and employers. In the same way, the low increase of it widens many social and economic problems. Here you can find a broader explanation of both scenarios:


In the first place, the rise in the minimum wage increases the remuneration levels of millions of people who are living in poverty, giving them more purchasing power and, consequently, activates the economy. It should be noted that purchasing power depends to a large extent on other factors. On the other hand, the inequality gaps are reduced as the resources generated by the companies in which they work are distributed, thus providing an inclusive growth for the majority of workers, generating in turn a more stable growth for a society.

With the increase in the minimum wage, the probability of entering a time of deflation is reduced, that is, a widespread and prolonged decline in the prices of goods and services due to low demand and an excess of productive capacities. An example of a case of deflation is that of Japan in the 90s, when sales stagnated and companies cut spending, entering a vicious circle of wages, prices and demand for low products.

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There is a risk of job cuts, since by increasing costs for companies, such as salary payments, social security, among others, they can resort to cutting staff and not hire more workers, increasing unemployment and hurting to more workers. An example of this can be that of American Samoa in 2007, an island where, when declaring the rise in minimum wages, it forced several companies to leave the territory and leave many workers unemployed.

Another possible implication is that, by increasing salaries, employers decide to reduce working hours for employees, reducing the amount of money they obtained before the salary increase due to the reduction in hours paid. It is also estimated that informal employment grows, since formal employment is very expensive for employers.

On the other hand, the increase in the minimum wage also increases the likelihood of promoting inflation in a country, increasing the prices of products, reducing the purchasing power of employees and leaving no increase in the monthly payment they receive.

The question here is how much to increase it?

First of all, it is necessary to clarify that the ideal minimum wage for each country is different. For example, in Colombia, the minimum wage is set at around 781,242 Colombian pesos (about 265 dollars), plus a transportation subsidy. However, this is only enough to cover 60% of the price of the family basket, which has an approximate price of 1,300,000 Colombian pesos.

Argentina, the country with the highest minimum wage in the region, is in a situation similar to that of Colombia. There is set a minimum wage of 10,000 Argentine pesos (about 530 dollars), but whose family basket has a price of 15,000 Argentine pesos, reaching to cover only 60% with the money of the minimum wage, as a result of the high inflation that registers the country at the moment. Situation not very different live countries like Ecuador, Peru and Paraguay.

On the other hand, in Chile, the third country with the highest minimum wage in the region of 276,000 Chilean pesos (about 455.4 dollars), it is possible to cover 181.87% of the family basket, with a price of 173,468 Chilean pesos. Therefore, the amount of the minimum wage, by itself, does not say much about the situation of workers, but it must be provided with other variables such as productivity, investment, exports and job creation.

LatinAmerican Post | Juan Sebastián Salguero

Translated from "¡Increíble! Estos son los pros y los contras de subir el salario mínimo"