Why minimum wage increases are not such a big deal after all

The highlight of this week’s Labour Day celebrations was the 18 per cent minimum wage increase announced by President Uhuru Kenyatta.

Indeed, this has almost become a yearly ritual. I don’t believe in the minimum wage for the following reasons: First, the Ministry of Labour has no capacity to enforce it.

How widely is the minimum wage enforced? Mind you, the minimum wage only applies to workers who don’t belong to unions and are, therefore, not covered by collective bargaining agreements.

Secondly, many workers don’t even know that a minimum wage exists.

But most importantly, I don’t see the economic merit of tinkering with the minimum wage in the context of a biting unemployment situation, where the majority of workers belong to the informal sector.

FORMAL EMPLOYMENT

Incomes of those already in formal employment will increase. But the cost of hiring unskilled labour will also increase.

We could end up with the unintended consequence of shutting low-wage and entry-level employees out of the job market.

The minimum wage used to make sense in the ancient regime when wages councils and the labour commissioner were powerful.

In those days, an employer would not be allowed to declare redundancies or to retrench staff without the labour commissioner.

Under the current liberalised environment, employers are likely to respond to an 18 per cent rise in the minimum wage by simply shedding unskilled labour.

THOROUGH RESEARCH

The problem in this country is that policy is made and announced before doing thorough research.

When you increase the minimum wage, what proportion of the population do you want to support?

This question is pertinent because we have an urban economy that is informalising in very complex ways.

If you took a random sample of the typical worker sitting in a matatu going to work in Nairobi today, what are you likely to observe?

FITNESS INSTRUCTORS

The majority will be hair-stylists, fitness instructors, disco bouncers, workers in the cleaning services, house-helps, cooks, watchmen, second clothes hawkers - and workers in car-wash bays and kiosks.

I can bet you that the far greater majority will be motor vehicle mechanics, workers in M-Pesa outlets, employees of call centres, mobile telephone repair shops, or shops offering photocopying and document binding services.

The trends in Nairobi’s central business district are an even more defining in terms of the features of the economic and social times we live in:

You will observe that the formerly ubiquitous duka - as shops owned by Kenyans of Indian extraction are popularly known - are disappearing fast, supplanted by 10’ by 10’ so-called exhibition stalls, selling uncustomed clothes, footwear, mobile phones and computers, which invariably will have been imported through Kismayu or Eldoret airports.

NEW ECONOMY

Today, even the smallest urban area has a “Garissa Lodge” — jargon for shops selling un-customed goods, clothes, and footwear, computers and unbranded mobiles phones.

How many workers are employed in this new economy and what wages do they earn?

The minimum wage is clearly not an appropriate response to stagnant wage growth.

The case for supporting earnings of low-income households cannot be gainsaid.

But since the legislation does not cover a large pool of informal sector workers, it cannot be not an effective tool of boosting wages of the majority of low-income workers.

ECONOMIC POLICY

Which brings me to the elections. How have they impacted on economic policy?

Do party manifestoes mean much and are we likely to see a changes in approaches to management of the economy after the elections.

I don’t believe that we will see real discussions about economic options for Kenya beyond Vision 2030.

In terms of economic policy, even the Jubilee administration has largely remained on the path set by the Mwai Kibaki years.

The government has kept expenditure of infrastructure- roads, electricity, ports and railways high by borrowing heavily from international and debt markets.

FUND INFRASTRUCTURE

A policy of borrowing to fund infrastructure is not bad. But the lesson we have learnt from Jubilee is that there is a limit to where growth from debt-financed spending and a credit-backed rise in property and paper assets can take you.

In the early stages, it was clear that the expansive fiscal stance they adopted allowed them to borrow to finance infrastructure without too much pressure on domestic borrowing.

But tax and spend has been stretched to its elastic limit. We need a national consensus on what should be done about taking the economy into a new productive age.

We need to focus on how to reset and renew the productive engines of this economy.

Yet from both sides of the divide, economic policy doesn’t seem to be a top agenda item. We have to do something about reinvigorating the export sector. It’s the economy. Stupid.

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