Is higher minimum wage the solution?

The recent article in Mada Masr on Egypt’s new public-sector minimum wage “falling short” makes the right point — that it will exacerbate inequality — but gives the wrong reason for why this is the case.

The problem is not that the new minimum wage is “not applied on the national level or across sectors.” The reason for the shortcomings lie in that nearly three out of four Egyptian workers are small farmers, self- employed or work in the informal sector. Those workers will not benefit from any increase in the minimum wage, whether it is restricted to the public sector or not.

About 41 percent of those in the informal sector earn less than the old minimum wage of LE700, and 75 percent earn less than the new minimum wage of LE1,200. The government has just increased the wages of those who are already earning more than about half the workforce.

To be sure, public sector workers are also better paid than those in the formal private sector. One estimate, from the Central Agency for Public Mobilization and Statistics (CAPMAS), puts the average public-sector wage at LE2,600, while the average in the formal private sector is LE1,600.

Other estimates, using different measures, all show a “public-sector wage premium.” In addition to having greater job security and benefits, public-sector employees are more likely to have a second earner in the household.

More importantly from the perspective of “social justice,” the effect of the minimum-wage increase will be to squeeze the formal private sector and expand the informal sector. The formal private sector and public sector draw from the same pool of workers. With an increased minimum wage — even if it was only applied to the public sector — the formal private sector will have to pay a higher salary to attract workers, making it more difficult to compete in world markets. As a result, the private sector will continue to deformalize, as it did when Egypt froze public sector hiring in 2003.         

Finally, if the higher minimum wage is extended to the private sector, it will lead to formal-sector job losses. Large firms with high profit margins, with workers who are paid close to the new minimum wage, can absorb the increase without shedding labor. But 95 percent of Egyptian firms employ less than 10 workers, many of whom are paid considerably less than LE1,200.

Suppose firms decide to increase the salaries of those earning LE900 or above to the new minimum wage, and fire (or “deformalize”) those earning less than LE900, on grounds that the increase is too costly. Given the distribution of earnings, in a firm of 100 workers, about 20 will see their salaries increase by an average of LE177 a month, while 38 — about twice as many — would lose their formal jobs.

Instead of raising the minimum wage, the government can consider other options that have been shown to benefit workers, especially poorer ones. Publicly financed community development and service delivery programs can provide employment, especially to young people in urban areas, as they have done in developed countries, such as the US and Canada.

In rural areas, self-targeted public works programs, similar to India’s National Rural Employment Guarantee Scheme, have significantly increased work among prime-age, low-skilled people living in poorer districts. In fact, the World Bank and other development partners are financing such programs through implementation by the Social Fund for Development and a number NGOs to give unemployed youth, especially in Upper Egypt, opportunities for employment of several months a year. Given the size of the informal sector, programs that give business training to the self-employed and micro-entrepreneurs can help a large number of workers, as they have in Peru and Central America.

For the formal sector, a temporary targeted wage subsidy — with clear verification of whether it leads to higher net employment — is preferable to raising the minimum wage, although these programs too can be quite expensive. Finally, a government program that helps match workers to jobs may help fill the estimated 600,000 vacancies in this country of relatively educated job-seekers.

Shanta Devarajan 
Tara Vishwanath 

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