Does increase in minimum wage affect productivity?

Every Labour Day celebrations Kenyans are treated to political and economic power plays between employers, the government and trade unions over the country’s minimum wage.

Trade unions often push to have the minimum wage raised to reflect the inflationary pressures whilst the employers often protest that shouldering the burden of additional wages will cut the bottom line.

This year, the head of the Central Organization of Trade Unions, COTU Francis Atwoli rekindled the debate during a meeting with labour sector officials.

“The widely believed concept by some employers and governments that higher levels of minimum wage increase unemployment have since been disapproved and research now shows that minimum wage setting increases employment and productivity and therefore leads to increased economic growth hence more chances of creating employment opportunities,” he explained.

The federation of Kenya Employers, FKE has over the years lobbied the government especially, in the months leading to Labour Day not to increase the minimum wage.

“We need sober discussions between trade unions, employers, and the ministry. We must take into account all the factors for wage determination, including productivity, ability of our economy to create jobs, and the impact of wage increases on the ability of the informal sector to operate,” FKE Executive Director Jackline Mugo told the Standard in an interview earlier this year.

Both employers’ and trade unions’ viewpoints are accurate to a certain extent.

Kenya’s minimum wage policy was introduced before independence with the objection of reducing poverty and promoting the living standards of workers.

The National Wage Board is a tripartite institution composed of the FKE, COTU and the National Treasury and its key role is to ensure that the minimum wage and collective bargaining agreements are negotiated with the full participation of each stakeholder to guarantee consensus.

According to a paper prepared by the Kenya Institute of Public Policy and Research, KIPPRA for the Salaries and Remunerations Commission, SRC in early 2013 stated that the private sector does not often implement the minimum wage unlike the public sector.

“The private sector pays much less at the lower cadres than the public sector and if we take the lowest public sector wages as the minimum wages set by the government, then the lower wages seen in the private sector at the lower cadres means that most private sector employers of the low skilled and low educated workers do not respect and implement minimum wage legislations.”

It is therefore apparent that most employers in the private sector do not adhere to the minimum wage guidelines, ending up paying their workers at the lower cadres’ wages that are way below the minimum wages.

Implementation of the minimum wage consistent with a desired pay to earn a decent living would help reduce inequalities in this sector. Besides, it is important that the country establishes the basic living earning/wage to inform minimum wage setting.