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About the minimum wage

Feb 28,2021 - Last updated at Feb 28,2021

The minimum wage in Jordan was recently increased from JD220 to JD260. As would be expected, the decision was faced with some resentment from business owners, especially small businesses. The merits and demerits of such an action, decreed principally to please workers, and arguably to alleviate some of their distress, are discussed below. 

Historically, the minimum wage was introduced near the end of the 19th century, and not without controversy. New Zealand, in 1894, became the first country in the world to introduce a minimum wage. It was in 1986 by the state of Victoria in Australia, and the United Kingdom in 1909. The US only introduced in 1938 and after strong lobbying from women groups. It took courts in the US three years to finally approve it in 1941.  

In Jordan, the minimum wage was a latecomer, but once born, it grew in magnitude unabated. The minimum wage came into being at JD80 in 2000 and continued to increase with considerable frequency, six times in two decades (JD85 in 2002, JD95 in 2005, JD110 in 2006, JD190 in 212, JD220 in 2017, and last week to JD260).

Interestingly, with the exception of 2005 and 2006, the minimum wage was hiked at times of slow economic growth. In recent times, it increased while inflation was low, unemployment was rising, and growth was stagnating. Globally, a typical regulator would raise the minimum wage at a time of high growth, accelerating or hyperinflation, or both.

Opponents of the minimum wage (conservatives) argue that a minimum wage threatens small enterprises, and causes them to shrink production and enterprises; thus laying-off workers. Furthermore, they underscore that it does more harm to those it is supposed to protect, the low-skilled workers, youth and women as employers would typically let them go. In a country like Jordan where the informally employed (those without formal employment contracts) make up over 40 per cent of production, the informality may easily increase as employers veer more toward it to avoid paying the higher wages. 

On the other hand, the proponents of the minimum wage (liberals) argue that the workers who do stay at work and benefit from the higher wage, spend more and thus increase demand, which would pull supply (greater production to meet the demand), and create more jobs in the overall economy. Hence, in the long run, those who were let go would have greater work opportunities at the higher wage.

Empirical studies worldwide have not helped the debate. Both conservative and liberal economists have provided evidence to support their arguments; however, neither side won, as the results of the studies were not conclusive. 

What about the case in Jordan? While raising the minimum wage is subject to great debate in developed countries; in Jordan, the topic is subjected to some (scant) consultation and limited public-private dialogue. Moreover, the minimum wage is used in these countries to counter inflationary pressures on the fixity of low wages. But in Jordan, hikes in the minimum wage seem to be independent of inflation. Hence, one could surmise that they are a social policy tool aimed at relieving low wageworkers at the expense of micro, small and medium enterprises (MSMEs), which make up 99.6 per cent of enterprises in Jordan. 

Critics in Jordan claim that the government by raising the minimum wage at such dire economic times is shifting the burden of improving welfare, which is a contestable outcome according to the research, unto the private sector. While the cost of production inputs (energy, taxes, transport, transaction fees, land, water, etc.) in Jordan have been high, and COVID-19 has depressed economic growth considerably, and raised unemployment, poverty and bankruptcies, MSMEs and even larger companies would consider the increase in the minimum wage as an ill-timed decision.

But welfare need not be a zero-sum game whereby one’s gain comes at the other’s expense. So what is the solution? An optimal policy requires using a host of tools and not simply one to reduce the impact on vulnerable groups, including MSMEs. Namely, the government can offer to MSMEs, which would include: tax waivers or reduced taxation, lower the cost of the borrowing and provide interest free loans, introduce subsidies, lower energy prices and a host of other measures to counter the negative impact on the cost of production due to the increase in the wage bill. 

Such a set of policy tools requires dialogue and coordination among the concerned government institutions (Ministry of industry and Trade and Supplies, Ministry of Finance, Ministry of Labour, Ministry of Energy, the Central Bank, Ministry of Social Development, among others).  What is more, the civil society, including but not limited to those representing the business owners, should be consulted; on balance, they would know best who and where the vulnerable parties are.  Managing the economy is not and cannot be the mandate of any one department; it is a complex process that requires the inputs of all. The minimum wage showcases such complexity.

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