Bare minimums

Have high minimum wage levels stifled economic growth in Papua New Guinea?

Benedict Y Imbun

Economics and finance, Government and governance | The Pacific

16 November 2015

Ever since the establishment of the Minimum Wage Board in the 1960s, PNG wage levels have been an issue of contention, writes Benedict Imbun.

There is no development policy in Papua New Guinea (PNG) that has been debated as intensively and passionately as the minimum wage.

Since the establishment of the Minimum Wage Board (MWB) in the 1960s, heated debates over PNG wage determination has found trade unions, employers and government at loggerheads as to what levels of minimum wage should prevail. The central tenets of the debate have been that wage levels in the country are high and therefore not sustainable for the economy.

The implications of these claims are that high minimum wage levels have stifled economic growth, caused unemployment, adversely affected international competitiveness, and undermined the capacity to pay and productivity of businesses.

The reality is that minimum wages have not been high, but low. Despite the debates, which are largely based on economic efficiency arguments, PNG’s endeavour to come up with viable minimum wage had to be done to gain efficiency without compromising the social wellbeing of its workers.

PNG is one of few countries in the developing world where deliberate official intervention in the form of a centralized minimum wage fixation body (Minimum Wage Board) shape wage policy for the country. While the triennial MWB sittings have been disrupted in the past two decades, the Body has played a decisive role in determining minimum wages for bulk of the working population.

Many critics view the centralized national minimum wage fixation body as responsible for determining and supporting unsustainable wages. But apart from the prescribed rates being public knowledge, minimum going rates in the labour market are unknown, although many employers are thought to pay workers less.

The abandonment of a Consumer Price-Index (CPI) linked minimum wage with the 1992 MWB determination allowed for wage negotiations between management and workers, based on capacity to pay and industry profitability. But a failure to take up this option has made the relationship between management and unions/workers less transparent in workplaces. Unless the MWB shoulders committed responsibility in upholding its role as custodian of economy and civility, one-dimensional views of minimum wages will continue to exist as a politicization of a far more complex development issue.

The ‘high wage’ country claims are contested by stressing that despite the nominal increases, the real value of wages has been declining since 1972. Wage debates and deliberations in PNG have been lop-sided as wage costs have been given more attention than wage incomes. Further, wages are not responsible for unemployment, international competitiveness, or economic growth. The result may have been a depressing effect on the already low levels of labour productivity.

There is a need for a serious stocktake and change in direction. Investment in the labour force instead of further wage cuts is long overdue. Any wage cuts in an already-reduced real wage (of K3.20 = US$ 1.20 hourly rate) have the potential for accelerating poverty levels that are already acute by global standards, and exacerbated by labour market deregulation.

Any thought of further wage cuts will not stimulate sufficient employment to clear the existing labour market disequilibrium, because wage employment is only a small proportion of total employment. The 2011 census statistics show that formal wage employment is only 20 per cent of total employment. A downward adjustment in the hope of creating employment will therefore not affect the majority of the potential labour force that is engaged in non-wage employment.

The focus of the current wages debate in relation to employment creation should be on the productive capacity of the workforce, and not on the irrelevant issue of wages. The role of demand in job creation has also been neglected in wages debates in PNG. This is very important, especially in the context of the current economic climate, because external factors have had a major impact on current economic difficulties. Therefore, it is important to create domestic demand stimulus as an added source of economic growth and employment creation.

A policy of downward wage adjustment will depress domestic stimulus. What the PNG Government needs is a broad-based approach in shaping and implementing appropriate supplementary policies (such as on law and order, infrastructure and land tenure) to consolidate the current wage policy framework in order to promote development.

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