Business

Uniform minimum wages not suitable for Zambia

FELIX MWENGE
IN 2011, Government increased the minimum wage for general and non-unionised workers from K767 to K1,132. Since then, there has not been any study undertaken to assess its impact, especially on different industries.

New research undertaken by the Zambia Institute for Policy Analysis and Research (ZIPAR) in 2016 titled ‘Labour Market Regulations and Labour Market Outcomes’ explored the impact of the minimum wage adjustment on different industries.

This article presents some of the study’s most important highlights and offers suggestions on setting minimum wages that preserve business while ‘leaving no-one behind’ by ensuring decent pay for workers.
The primary role of minimum wages is to improve wages of lowly-paid workers, which potentially impacts positively on poverty through enhancement of the poor’s purchasing power.
Minimum wages can also be a mechanism for reducing income inequality through addressing wage inequalities in the economy. Minimum wages are thus an important tool in addressing pillars two and three of the Seventh National Development Plan (7NDP), which focus on reducing poverty and vulnerability and developmental inequalities.
However, from the firms’ perspective, minimum wages increase the cost of doing business through increased wages. This can affect labour demand in the end reducing employment opportunities as firms seek to limit the number of workers.
Our study partly investigated how the 2011 upward adjustment of the minimum wage impacted on business by conducting firm level interviews and analysing the Living Conditions Survey data.
Most firms interviewed were of the view that minimum wages are necessary and hence were willing to comply.
However, a number expressed concerns about the vagueness of the setting of current minimum wage amount. Firms also complained about lack of consultation by Government when they adjusted the minimum wage.
Most small and medium firms reported that the new minimum wage made doing business expensive as it increased their wage bill. Some of them opted to downsize their labour to be able to cope.
Nonetheless, this experience was common only in the early stages of the adjustment as firms were able to adjust and pay the minimum wage eventually. Large-scale businesses said they did not need to lay off any worker as they could pay the minimum wage with relative ease.
In international literature, a minimum wage is ‘good’ for business if it is below 40 percent of the average wage and ‘bad’ if above 40 percent for developing countries like Zambia with considerable unemployment. This means firms only need to adjust old wages by 40 percent to be compliant with the minimum wage.
We assessed 20 industries and found that only four in 2012 and seven in 2014 had the minimum wage falling below 40 percent of respective industry average wages.
In 2012 these industries were professional, scientific and technical activities; mining and quarrying; financial and insurance activities, and electricity. In general, wages in these industries were already sufficiently high compared to the new minimum wage.
Two years later, obviously after salary adjustments, more industries moved into the 40 percent threshold. These are public administration; education and human health and social work.
For the rest of the industries, the new minimum wage was above 40 percent of the prevailing average wage in both years. Complying with the new minimum wage for these industries required increases of more than 40 percent of the average wage.
The top four industries with the largest minimum wage impact had their minimum wages exceeding 100 percent of the industry average wage. These are: agriculture (129 percent); construction and wholesale and retail trade (103 percent) and administrative and supportive services (108 percent). These industries had to more than double their average wages in order to be compliant with the minimum wage.
This has important implications on their wage bill and significantly increases the cost of doing business. The research also shows that these and similar industries are also among the least compliant with the new minimum wage.
Based on our research, Zambian businesses generally understand the need for and are willing to pay the minimum wage.
However, small firms may have difficulties to adjust in the early stages and this may lead to reducing labour demand and employment creation.
Furthermore, we find that industries such as agriculture; construction; wholesale and retail trade and administrative and support services, which employ the majority of low-skilled workers, are particularly the most impacted by the current minimum wage. This is partly because they already had relatively low wages compared to the minimum wage.
In general, a uniform minimum wage across all industries seemed too high for some while reasonable for others. For those for which it was too high, compliance was also very low, thus disadvantaging the workers.
In future, minimum wage policies should consider the plight of small businesses and recognise industry variations. In practice, industries such as agriculture should have their own minimum wage calculated separately based on industry specifics such as size of business.
Failure to do this may lead to low levels of compliance defeating the very purpose of the minimum wage and at the same time hindering employment growth.
The author is a researcher at the Zambia Institute for Policy Analysis and Research (ZIPAR).

 


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