While Government does not wish to place additional stress on the small business sector, this can in fact materialise with the proposed increase in minimum wage in the public sector from $20.50 an hour to $22.50 an hour, says Garvin Joefield, economist with the Economic Intelligence Unit at Republic Bank Ltd.
“While the minister indicated that his desire was not to place pressure on MSEs (micro and small enterprises) and marginal firms I think the very fact that we would have programmes like CEPEP and URP offering higher rates of compensation than in the SME sector and for marginal firms it could bring about the very thing that he feared.
“If we throw our minds back a few years, members of the manufacturing sector and some SMEs were saying they were having problems attracting workers because of programmes like CEPEP and URP, which offered relatively attractive rates of employment...CEPEP and URP might be required to work five hours where as an SME might be required to work eight hours or may be even more,” Joefield explained to the Business Guardian in an interview at the annual post-budget event hosted by the T&T Chamber on Tuesday.
In his budget presentation on Monday, Finance Minister Colm Imbert said effective November 1, the minimum wage for public sector employees will be increased by $2 per hour, from $20.50 to $22.50.
This increase is expected to cost the Government $75 million in fiscal 2025.
However, Joefield said making the compensation rate “more attractive” could bring about the very challenge that the Finance Minister had sought to avoid as increasing the minimum rate only for Government workers could mean that SMEs and other such entities would now have to compete with the Government for workers and “could be priced out” of the market or even forced to hire fewer workers.
All of this, Joefield advised, could also negatively affect economic activity.
“The possibility exists that we could face something where working for URP, CEPEP or other Government programmes that offer such rates could be more attractive than actually working for SMEs, which as we know, tend to have workers spend longer hours on the job and the work might be a little more involved. So if you look at it strictly from a compensation point of view, it might actually be a situation where SMEs being priced out of the market or facing a situation where CEPEP or URP could be more attractive,” Joefield reiterated.
There have also been concerns by some business groups that the increase in minimum wage could bring about further inequity between public and private sector workers.
Joefield however, contended that this was not a simple “yes or no” answer, as there could be significant “disadvantages” for both.
“What we need to look at is the net benefit so the net benefit of an across-the-board increase could be significant challenges on SMEs to keep up with a minimum wage of $22.50 and we would have some SMEs falling out. We would have a greater level of unemployment. We could have SMEs reducing the number of employees and which we would have underemployment.
“The approach by the Government to only roll out the minimum wage for its workers could have a similar impact but on a smaller scale but the net effect of that is something that we cannot weigh until we have actual data...Perhaps a full roll out of the minimum wage could have been more deleterious to the SME sector but I’m saying at this point I’m not sure but the risk of a full roll out as opposed to the risk of a partial roll out, they are both material risks and they are both risks we need to consider,” Joefield further explained.
Additionally, he noted that in the last ten years country’s labour participation ratio regarding unemployment fell from around 62 per cent in 2012 into the mid 50s currently.
Joefield said this ratio represents members of the labour force who are actually active in seeking employment or working.
“What we have is the percentage of the population that has been withdrawing from the active labour force; that has been trending up over the last ten years or so.
“So if people become disillusioned for example, with the dichotomy between higher wages in the Government service as opposed to the private sector but they are unable to get Government jobs, some of them could just withdraw because of that inability to secure a job for the rate that they desire. So it’s a multiplicity of things we need to consider and it would be very difficult to say clear cut which policy would be the best,” Joefield emphasised.
On whether she believed the SME sector could be negatively impacted by the minimum wage increase proposal, Kiran Maharaj, president of the T&T Chamber of Industry and Commerce, said, to date, the organisation has not had sufficient feedback from its micro and small entities to determine what this impact could be.
However, she said the proposed minimum wage increase can have an impact on the SME sector because the minimum wage hike in the public sector makes the national work environment more competitive.
At the same time, Maharaj noted the private sector offers other opportunities and options that Government may not such as remote work.
She also advised that regarding the private sector, this would also depend on its business model.
“And it’s going to depend on if we can’t increase wages because our budgets don’t allow, then can we do something else for our employees that would make them comfortable. It may be more time off from work, more vacation, it may be working from home on a certain day or other privileges.
“It’s going to depend on the negotiations within each company on how they want to address it with their employees,” Maharaj advised.
But can Government afford to increase the minimum wage at this time especially faced with another deficit budget?
Colin Ramsey, tax partner, EY Caribbean also told the Business Guardian that the concern is that given the high Government expenditure, which is around $60 billion, the increase in the public sector minimum wage would create more of a deficit scenario as opposed to “getting out of it.”
However, he said at the end of the day an increase in minimum wage is something what the minister would have budgeted for and based on the arithmetic done, it’s something the country can afford. But, he said, more clarity is needed as to where the monies would come from to pay the increase in minimum wage.
“What we do know for certain is it would mean more expenditure,” Ramsey added.
He said the decision to increase the minimum wage could be a case of Government wanting to make life a little more bearable for citizens. We have to bear in mind the social issues impacting our society. Crime continues to be high, inflation continues to be a real issue and in order to level the playing field and make life a little more affordable for those vulnerable in our society, this may be the impetus behind the measure,” Ramsey explained.