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Proceed with caution on minimum wage

Mixed blessing: protesters call for a minimum wage in 2014.

Bermuda is considering implementing a minimum wage. It should proceed with caution.

Simple supply and demand would appear to dictate that if wages were increased, then this would lead to a fall in jobs as employers controlled rising costs by reducing hiring or automating functions.

But this may not necessarily be so. There is a growing body of research to suggest that a rise — or, in Bermuda’s case, the simple establishment of a minimum wage — can lead to economic growth and, in the long term, increases in employment.

That’s because increased wages would lead to more spending in the economy by the beneficiaries, who in this case would be among the lowest-paid. Rather than save the increases, they would be more likely to spend them on improving their quality of life.

As a result, businesses would see increases in sales, which in turn would lead to extra investment and hiring.

But this is not entirely clear-cut, and the ramifications for a narrowly focused economy such as Bermuda’s are also not obvious.

The Wage Commission recognises this and has laid out three options, although it has failed to release its actual report, so the thinking behind them is unavailable. Requests for the report by this newspaper have fallen on deaf ears.

The first is a proposal for a minimum wage set at the “wage floor” of $13.20 an hour, which the commission says is where most employers’ lowest wages are now, leaving aside people whose incomes includes tips or other forms of gratuity or built-in benefits such as housing.

This is the equivalent of $25,720 or about 42 per cent of the median wage in Bermuda and would be unlikely to result in any job losses, according to the commission.

The second proposal is for a median wage of $15.75, which is 50 per cent of the median hourly wage or $30,700 a year. This is described as a stretch for some employers, but the commission thinks they could achieve it without reducing employment.

The third option is a minimum wage of $17.30 an hour, which would be 55 per cent of the median hourly wage or about $33,750 a year. Some employers would have to take measures to achieve this wage while others may go out of business altogether, the commission said.

Of the three proposals, the consensus among economists is to take 50 per cent of median income as a guide. This is regarded as being not too onerous while at the same time it would lift a considerable number of people out of poverty.

In Bermuda’s case, this would result in about 4,500 job holders, or 13 per cent of all held jobs, seeing their wages increase. In the absence of the full report, it is not possible to see all of the calculations, but it is fair to say that this would put tens of millions of dollars, perhaps as much as $50 million, into the economy provided there were no job losses.

While much of that money would flow back into the economy, it would in the first instance be added to employers’ expenses, and they would have to find ways to cover those costs.

They could raise prices and pass the costs on to consumers, but in an economy as fragile as Bermuda’s Covid-ravaged one, many would be loath to do that.

They might look to cover the costs through efficiencies, but many have cut costs to the bone already. Some would look to further automate functions, which would of course lead to job losses.

They could accept narrower margins, but few local employers are in a position to do that, so it is likely that many would look to reduce labour costs, either by not hiring, reducing hours or cutting jobs.

In addition, there is a risk that increasing wages for those people earning less than $30,000 a year would drive wage increases farther up the salary ladder, as those employees earning more than $30,000 would seek to maintain their wage superiority — as would employers.

This would again put more money into the hands of discretionary spenders, further driving growth.

But while there might be growth in some parts of the economy, there would almost certainly be job losses and reductions in working hours in others, so policymakers would have to recognise that there will be pain, which could haunt political leaders. Further, the job losses would mainly affect the poorer and less marketable people — thus hurting the very people the measures were supposed to help.

So policymakers should beware of unintended consequences that could lead to a more unequal society, not a more equitable one.

In part this is driven by the nature of Bermuda’s economy, which is divided into two starkly different primary industries. For the most part, international business will barely notice a minimum wage since few salaries in this sector would be affected by it. These are capital-intensive businesses where labour costs are less critical in relative terms than in other businesses.

On the other hand, the sectors of the economy that are much more dependent on tourism tend to be labour-intensive businesses where the need to manage personnel costs is critical to their survival, and it is these areas where the bulk of those earning less than $30,000 per year are concentrated and are therefore more likely to find their jobs under threat.

So finding the point where a reasonable increase will help to lift people up without resulting in job losses or reductions in hours is critical. To that extent, it would make sense to introduce such a policy gradually, as President Joe Biden is proposing in the US where the proposed increase in the minimum wage is slated to occur over four years.

In the US case, the proposal is to raise it from $7.50 an hour to $9.50, then to raise it by $1.50 per hour annually until reaches $14 and then add $1 an hour in the fourth year to bring it to $15.

In that way, businesses can plan for the increases and will not be hit by an immediate surge in their wage bills. In Bermuda’s case, the minimum wage could be started this year at $12 an hour, and then be increased by $1 an hour each year for three years.

This would allow policymakers to monitor the effects of the increases as they happen, meaning they could apply the brakes if it looked like trouble was looming, or accelerate the process if it looked like the policy was benefiting individuals and the economy as a whole.

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Published May 19, 2021 at 8:00 am (Updated May 18, 2021 at 2:53 pm)

Proceed with caution on minimum wage

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