Colombia’s ‘disastrous’ minimum wage is restraining its development

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Christopher Pissarides, winner of the Economics Nobel Prize, emphasized the need for a labor reform in Colombia, starting with the minimum wage

In Colombia, the legal minimum wage is around $ 828,000 Colombian pesos, about USD $260. Although for many of those who receive it, the figure seems negligible, for Christopher Pissarides, it is one of the main obstacles to the country's development.

Leer en español: El 'desastroso' salario mínimo de Colombia está impidiendo su desarrollo

In the framework of the Banking summit in the city of Cartagena, Pissarides took the stage to talk about the Colombian economy. According to his analysis, the main challenge facing the Colombian economy is in the labor market. The fight against unemployment and informality must be, according to the economist born in Cyprus, the government's priorities for the future and, to overcome the struggle, he recommends reducing the 'disastrously high' minimum wage.

The minimum wage in Latin America

The minimum wage in Colombia ranks 13th among the highest in Latin America. Over Colombia is Brazil, whose minimum wage is barely a dollar higher.

The highest minimum wage in the region is held by Costa Rica with USD $530, although according to the law, it varies according to the occupation of the person who deserves the salary. Costa Rica is followed by Chile and Uruguay, where the minimum monthly remuneration is USD $443 and USD $426 respectively.

Above Colombia are also found: Panama (USD $265), Peru (USD $282), Bolivia (USD $307), Honduras (USD $383) and Ecuador (USD $394).

Meanwhile, the lowest minimum wage in the region is in Venezuela, where it barely reaches the equivalent of $6 dollars. Above Venezuela, also in the last positions, are Cuba (USD $29) and Haiti (USD $70).

What are the arguments to reduce the minimum wage in Colombia?

Pissarides is not the first to suggest a drastic reduction in the minimum wage in Colombia. The Finance Minister, Alberto Carrasquilla, also emphasized the need to reduce it, categorizing it as "ridiculously high".

For Pissarides, the point at which the minimum wage is found is one of the main promoters of informality, as it discourages legal hiring and promotes mechanisms such as contracting for rendering services or completely extralegal, as well as unemployment.

So far this year, unemployment in Colombia has reached levels that weren't reached since 2012, covering 10.3% of the labor force in April despite an acceleration of economic growth.

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"It was a terrible and disastrous policy for Colombia to raise the minimum wage above what productivity increased," said Pissarides, who is a professor at the London School of Economics.

One way to measure productivity is through the GDP per hour worked, which shows how much value each hour of work creates for the economy. In this area, Colombia ranks 55th worldwide, with a GDP per hour worked of $ 11.26. Norway leads this ranking with a figure of $ 75.08, while in Latin America it leads Chile with $19.55.

Specifically, he argues that a reduction in the minimum wage is necessary to allow new members of the labor force, many of whom are Venezuelan migrants, to enter formal employment.

What are the obstacles to reducing the minimum wage?

During the last 10 years, the minimum wage in Colombia has grown between 4 and 7% annually, while in the first year of the presidency of Iván Duque, it increased by 6%, almost twice the inflation registered for that year, which was 3.1%. With such a strong and lasting upward trend, managing expectations regarding the minimum wage is one of the biggest obstacles to a potential reduction.

Certainly, a proposal to reduce it would bring with it a very high political cost for those who support it, which has led politicians to leave the issue outside their agenda. This is why Pissarides suggests that the government should "bite the bullet" by taking the blow of unpopularity, for what he considers is for the general good of Colombia's economy.

Another problem with a possible reduction of the minimum wage has to do with the effect it could have on informality. Because of the high labor informality in the country, which is 47.7% of the labor force according to the DANE (National Department of Statistics of Colombia), in many jobs and industries prevail the irregular forms of payment, either by commission or 'piecework' (some payment related to how much is produced). This means that for industries such as agriculture, which is paid on a 'piece-rate basis', the figure of the minimum wage has never been recognized since it does not meet the needs of the employer.

Informality also allows workers to be hired by the hour or by the day, a common practice in Colombia. According to Camilo Herrera, founder of the market and consumer analysis company RADDAR, interviewed by Dinero magazine, many workers agree to be hired by these means to avoid having to declare rent. Since the figure of the minimum wage in its current form does not contemplate hiring for periods of less than one month, its reduction could have limited effects on an important part of the labor market.

LatinAmerican Post | Pedro Bernal

Translated from "El 'desastroso' salario mínimo de Colombia está impidiendo su desarrollo"