FOLLOWING several appeals from trade unionists, minimum wage earners will receive an additional $2,000 every 40-hour work week beginning April 1, 2022. The new $9,000 weekly price floor is a legal minimum payment set by the Government, of which employers can exceed but legally they should not fall below.

The 28.57 per cent increase in the minimum wage has been met with public scrutiny, along with gratitude. The outrage by the public mainly highlights the sparse increase in wages when compared to the country’s exchange rate. However, the USD is not Jamaica’s centralised currency, so the urge to compare the minimum wage increase and the USD conversion has deflected from more critical conversations. A better basis of comparison is the magnitude of the increase, whether it is a real increase versus a nominal increase.

While some minimum wage earners may be elated for a nominal increase of approximately $8,000 per month, the purchasing power of the new wage may not significantly increase. Nominal increases or ‘face value’ increases disregard inflation, while real wage increases account for the current inflationary climate and considers the value of wages in terms of how many goods and services can be purchased. The last minimum wage increase was implemented in August 2018 and since then price levels have risen 21.51 per cent. The following simplified calculations illustrate how the real wage will change, since the last increase in 2018:

real wage: wage – (wage*inflation rate)

real wage (in 2018 $s) with salary increase: $9,000 – ($9,000*21.51 per cent) = $7,064.1

The real wage increase of $64.10 is not expected to increase the standard of living for minimum wage earners. Let’s focus on the cost of housing in the current environment of rising interest rates. Higher mortgage rates are passed down to higher rental rates, thus increasing the cost of housing across the board for everyone, including minimum wage earners. In just the last year rental rate has soared 10.92 per cent. The additional income will go towards the increased rental and mortgage rates, while increased utilities, food, education and transportation expenses have not yet been accounted for. Thus, highlighting the minute increase in the quality of life for low-income earners.

On the flip side, an arbitrary minimum wage of $20,000 per week would have been more gladly received by low-income earners and unions. The calculation below shows that such an increase would raise real income by $8,698. However, an increase of this magnitude could stimulate consumer demand, while pushing inflation further away from the central bank’s four per cent to six per cent mandate.

Real wage (in 2018 $s) with arbitrary salary increase: $20,000 – ($20,000*21.51 per cent) = 15,698

Having explored the real value of the minimum wage increase and a consequence of too high of an increase, there are still calls for a greater increase. However, it is essential to note that employers can go above $9,000 weekly but the capitalist nature of business operators will not allow them to do so. The aim of companies is to maximise profits, but increased staff costs eat away at profits. They may decide to cut hours and staff to keep profits afloat while adhering to the wage structure or fall within the informal sector. Along with the capacity of employers to pay higher wages, the productivity of labour is also considered. The wage is decided based on the general level of output produced, so marginal increases in output cannot be significantly rewarded.

Although the real increase in the minimum wage is not sufficient to drastically improve the standard of living of many low-income earners, several other factors including the impact on inflation, profits for firms, the unemployment rate and the government’s wage bill, must have been considered before this increase was granted.

Melissa Foster is research analyst at VM Wealth Management Limited. She is fervent about local and regional economic growth, and her primary focus is sevaluating the effects of macroeconomic changes on the financial sector and the wider economy.