When we wrote this post back in March 2016, Maduro had approved 11 minimum wages in little under three years. Since then, three new raises of the minimum wage have been approved.

Starting on November 1st, minimum wage in Venezuela will be set at BsF 27,091 plus BsF 63,720 in food benefits.

Back in March, we stated that rather than promoting policies to tackle inflation and restore the purchasing power of the bolivar, the central government kept on implementing populist measures that accelerated an already rising inflation.

Nothing has changed since then.

(…)

Revolutionaries and the opposition don’t see eye-to-eye on almost anything, but in their public pronouncements they both seem to care about one thing: making sure workers have a decent minimum wage.

President Chávez was a huge fan of the policy of raising the minimum wage to make it seem like he was improving workers’ wellbeing. In 14 years of government he raised the minimum wage 21 times, and President Maduro has maintained the push with a whopping 11 minimum wage increases in little less than 3 years.

But, to be clear, just like the exchange controls, price controls and many other forms of interventionism, the Venezuelan minimum wage was not invented under Socialismo del Siglo XXI. It is not a child of Chávez, much as chavistas might claim it is. It is also not the panacea our politicians think it is.

A brief history of Venezuela’s minimum wage

In 1958, the Law stated that the Executive Branch could intervene indirectly in the setting of wages. The Law on Collective Agreements by Branch of Industries, published in Gaceta Oficial No. 25,818 on November 21st 1958, stated that “the collective agreement in the labor-management agreement or the arbitration award may be declared by the National Executive of mandatory extension to other firms and workers in the same industry.”

The minimum wage itself was fixed for the first time by President Carlos Andrés Pérez in 1974 -ironically enough- vía Ley Habilitante (Enabling Act): ordinal 10 of Article 1 of the Enabling Act empowered the President to “enact minimum wage and increases in salaries, wages and benefits required to raise the living standards of the population and improve the distribution of income in accordance with the general policy that defines the National Executive.”

So, through Decree-Law No. 122 of May 31st, 1974 (published in Gaceta Oficial No. 30,415 of June 4th, 1974), Presidente Pérez set:

  1. A daily minimum wage of Bs 15. (Article 1)
  2. A monthly minimum wage of Bs 300 for domestic workers, when the employers earned over Bs 4,000 per month. (Article 2)

Fast forward 5 years and in 1979 Congress passed a General Law for the Increase of Salaries, Wages, Minimum Wage, Retirement and Old Age, Disability and Death Pensions (Gaceta Oficial Extraordinaria No. 2,518 of December 3rd, 1979). This law set:

  1. A daily minimum wage of Bs 30. (Article 6)
  2. A daily minimum wage of Bs 25 for workers engaged in agricultural and livestock activities. (Article 7)
  3. A monthly minimum wage of Bs 500 per month for domestic workers.(Article 8)

The love affair with the policy continues to this day. From 1984 until today, Presidents have continued to write Decrees to fix new minimum wages. Between 1974 and 1998 the urban minimum wage was adjusted and set 13 times: less than one per year. Between 1999 and March 2016 there have been 32 increases in minimum wage: nearly two per year.

It’s undeniable that Venezuelans are pretty much used to having a minimum wage fixed by the President, and they even applaud the fact. But, why?

The answer is rooted in the According to Chi-Yi Chen, the “direct intervention of the Venezuelan State in fixing wages reflects certain positions. These are: a) The worker is always exploited; never gets his due; b) The employer is enriched only through the exploitation of labor; c) Following the above two positions is conceivable that the only mechanism to equitably share the  surplus of the productive society is to compulsively impose a certain level of remuneration. The history of state intervention in recent decades exactly reflects these ideas, obviously influenced by the Marxist conception of capitalism.”

But is it a good idea?

When the first minimum wage was set in 1974, there were concerns. According to Hector Valecillos Toro,

Superficially, the measure seemed justified and could be seen as a discretion in favor of fair participation of workers in the sudden oil wealth. However, viewed less emotionally, it was clear that it wasn’t convenient to rush into a measure that often cause problems of a different kind.

First, because under President [Rafael] Caldera the inflation pace begun to accelerate (which, let us not forget, had been absent from the country between 1950 and 1969) and it wouldn’t be easy to circumvent the upward impact on prices of such decision. Second, and perhaps foremost, because the government chose a highly inconvenient mechanism to pay the staff, which by definition dissociates compensation and labor productivity “.

To understand these points better, let’s take a quick a pretty simplified trip down economic theory lane. Of course the academic debate over the impact of minimum wage laws continues to rage and the literature is enormous, but this is the bare-bones standard model people refer to when they participate in that debate.

A fixed minimum wage supposedly seeks to ensure that formal workers have a minimum monthly income to cover the basic needs of his family. So the minimum wage is increased when the old wage becomes insufficient to meet this goal.

But there is also the market equilibrium wage, the wage that would result if labor markets were allowed to work unencumbered. This wage would reflect the productivity of workers in each industry, and the particular dynamics in each market.

If, for example, a minimum wage is fixed above the market equilibrium wage, many more individuals will be willing to work than companies willing to hire them. Companies would have fewer incentives to recruit new personnel, thus increasing unemployment. Whether this is important or not will depend on the other factors affecting labor demand and supply.

In contrast, if a minimum wage is set below the market equilibrium wage, companies will want to hire more staff, but many individuals won’t have incentives to fill such positions at such low salaries. Ultimately, the minimum wage ends up not being used much. And let’s not forget that the supply and demand of labor force in each productive sector is different, so the equilibrium wage of each market is, in turn, different.

Fixing a minimum wage that does not correspond to the market equilibrium wage will generate distortions – the debate then is about how deep those distortions are, and whether or not there are benefits tied to them. And fixing it exactly at the equilibrium level is practically impossible, because nobody knows what that level is.

The important point is that wage levels should, above all, have some relation to workers’ productivity. If this condition is not met, an increase in minimum wage will ultimately translate into unemployment, and in an inflationary context, the minimum wage will become insufficient, the Central Government will probably increase it and the distortion game will begin anew.

In 1993, Chi-Yi Chen wondered “has the minimum wage really played the role that it was assigned, that is, to maintain a socially acceptable standard of living?”

The current minimum wage in Venezuela is at BsF 11,578 plus BsF 13,275 in food benefits. While this wage doesn’t cover the basic food basket, it also represents a substantial burden for formal companies, given the deep price distortions and controls under which they operate and the excessive labor regulations that stifle productivity.

Ironically, the minimum wage actually becomes an obstacle to formal businesses, reduces the number of quality jobs and creates incentives for formal workers to seek better wages in the informal market. Venezuela is then stuck in the worst of both worlds: with a minimum wage that is too low to afford basic necessities, and too high for companies to bear given the terrible business environment workers operate in.

We should all remember this: every time the government announces a new rise in the minimum wage in an inflationary context such as ours, it means that it has failed.

Raising the minimum wage is nothing but a means to an end. Raising the minimum wage with no concern for productivity should not be the goal. Raising the minimum wage while doing nothing to stem inflation is close to useless.

The goal should not be to raise the minimum wage per se. The goal should be to not have to raise it.

11 COMMENTS

  1. An extremely easy and “for dummies” way to put the effects of economic policies under ideological influences, extremes aren’t good in any way, if only it were easier to educate the rest of the population to understand that beyond the populist policies, the cycle can’t be broken if we keep doing the same thing over and over again. I don’t know much about economics as it’s not my field of study, but posts like this definitely show me that, sometimes a little common sense, and of course, the proper advising, can go a long way for the improvement of such a dire situation.

  2. “The goal should not be to raise the minimum wage per se. The goal should be to not have to raise it.”
    Not exactly a good idea. Studies have shown that a tiny bit of inflation is better for an economy than zero.

  3. I think there is something disingenuous about this piece that seems to mix on purpose the idea of having a minimum wage, that may be criticized and analyzed as convenient or inconvenient in a normal economy, but is not that controversial, with the clusterfuck that chavista economic policies that have wrecked in Venezuela, Many other countries have minimum wage and do not experience our inflation rate or scarcity or general mess. I confess not to have an opinion or read enough about minimum wage to deem it convenient or inconvenient as a principle. You’ll have to amend the Constitution to get rid of minimum wage which I think is political unfeasible. If this piece were presented as a general economics piece on minimum wage it would be interesting, but to do it in the context of Venezuela where many people are collecting 20 dollars a month as a minimum wage seems odd and disconnected.

    • Minimum wage is always a distortion just like any other price control. The magnitud of the distortion is what determines how bad it affects the economy. The more you raise the minimum wage the more unemployment and inflation grow and the more the economy contracts. Like the article says it has been raised 32 times in the last 17 years, that is a significant part of “the clusterfuck that chavista economic policies that have wrecked in Venezuela”

      The goal should be to not have neither minimum wages nor maximum prices.

  4. In early colonial times there was a constant traffic of sailing vesels from the Americas to mainland Spain , many carrying spaniards who had made it rich in their american sojourn and were bringing back home their riches in the form of long heavy chains of gold and silver wound around their torsos, As these vessels often experienced shipwrecks , where the passengers had to swim ashore or to some floating debris to save themselves it happened that many of those passengers drowned because the weight of those chains dragged them down the ocean dephts and they could not will themselves to part from their golden chains.

    It seems as if something similar may be happening with these minimum wages , they help people have more money to meet their inmmediate needs while at the same time feeding a runaway inflation that just keeps making things worse and worse for everyone , including their employers …..!! Dont know what can be done to break this frightful cycle , but evidently other countries have scaped it so there must be a way .

    Not sure I understand the relationship between productivity and wages , wages compensate labour, labour is one of four elements used in any productive process (real capital, intangible or technological capital and land ) , not all industries are uniformly labour or capital intensive , some are more labour intensive and some are more capital intensive so that the comparative contribution of labour to the outcome in some industries will be larger or smaller than in others, how do you then determine what wages to pay in an industry which for example is much more capital intensive than labour intensive ?? if productivity is more dependent on the capital used than on the labour used how do you apportion the remmuneration of labour vs that of which is paid to those contributing the capital ……not being an economist I get easily confused with these kind of issues ……..maybe a charitable soul, better versed than myself in the mysteries of economic thought can guide me out of this confusion!!

  5. It is obvious that this is not an economic decision by the Maduro and company. They could care less about economics or inflation this increase will cause. It is a political decision designed to have a positive image impact and gain support from the Venezuelan population. Its purpose is to keep them in power and maintain control over the people of Venezuela.

    “See we are doing everything we can to support you and overcome your problems created by the US Economic war on Venezuela”.

    Just look at the timing of this increase and all of the previous increases.

    It is some ways it like giving a “small freebee” to a drug addict just when he seems to be ready to walk away from drugs …. Just give them enough of a taste to keep him addicted and dependent.

  6. The minimum wage should simply be eliminated like any other price control.
    As long as you have a minimum wage that the government sets there will be too much pressure to increase it to levels that distort the economy.

  7. Even worse than draconian “minimum wages” and retarded price controls:

    http://www.elmundo.com.ve/noticias/economia/politicas-publicas/en-gaceta-oficial-ley-que-establece-inamovilidad-l.aspx

    This means you can hardly ever fire a thug, a thief, a bum, or an inefficient worker from your company. Thus, almost everyone steals, and few are motivated to really work or compete. Another recipe for corruption and disaster.

    Not only you have to give minimum salaries, deal with savage Unions, deal with chavista thugs and chavista ‘laws’, deal with corrupt ‘inspectors” but you can’t even fire terrible employees.. no wonder most businesses have failed, and those who can leave the country asap..

Leave a Reply