Friday, April 22, 2011

Egypt and Democracy: Economics - Setting a Minimum Wage

During a short conversation on twitter, a debate occurred over the viability of setting a minimum wage in Egypt.  It is commonly understood that 43% of Egypt survives on $2/day.  Most of these are what is also commonly referred to as "day labor" wage earners.  In short, laborers who pick up work on a daily basis instead of being full time employees of a company or have even short to mid-term contracts for stable employment.  

At the same time, 23% of Egypt's workers belong to some form of union or syndicate that proposes to work for members' rights.  These have, in the past, been subject to government interference that included almost arbitrary acts of either minimal appeasement of demands or outright strike busting, either through police action or by government interaction/threats/co-opting union leadership.

Around 2% of Egypt's citizens/employed are either wealthy businessmen/land holders/investors or related top managers of firms.  Many of whom have had close relations with the last NDP regime or were basically co-oped by government due to it's high regulation, corruption, nepotism and various other problems that required some form of collusion in order to simply do business in Egypt.

Then there is an official 9.7% (appx) that are "unemployed" though this number could include those who work within the informal "day labor" sector having exhausted all other attempts at regular employment and, consequently, can be a higher or lower percentage during any economic drive or slump without registering any officially recognized radical change of "unemployment". With a 43% day laborer employment sector in a down turned economy, the real unemployment rate is likely closer to 18-20%.  This leaves a regularly employed, non-union employment sector between 17 and 22% of the employable population (43mil employment age means 7-10 million).

An interesting aspect of the revolution is the convergence of the middle class, educated revolutionaries with the very large underclass to bring down the regime.  Many of the underclass were called down into the streets with shouts about the cost of bread (and cucumbers, tomatoes, etc) and wages.  This isn't unusual for most historical revolutions. Economics, where there is a rising middle class who are eager for political participation and a still majority working poor underclass, have played a role in almost every revolution.  The issue that faces each of these revolutions is how to funnel that energy into both political and economic reforms that serve both of these factions' demands while not decimating the capital/growth sector.

One of the issues currently being discussed, in some cases as if it was THE economic plan, is the setting or raising of a minimum wage.  The current figure discussed is $1200LE (Egyptian pounds)/month.  At the current rate of exchange that is approximately $200 US, $6/day or three times the current average wage of 43% of population.  


There are an untold number of issues with setting a minimum wage in Egypt, much less what sounds like an arbitrary number that is at best a straight line increase over a purported average income as opposed to actually tied to any economic factors.  The most important economic factor being reduced income growth across the board due to three factors: world wide recession, inherent corruption (limiting growth opportunity to select few persons/industries) and, of course, a revolution that has yet to produce a stable government and economic platform while the interim government (SCAF) continues to act as driver of centralized, command economy.

With decreased revenue streams, that means decreased tax revenues for the government.  The government has done what many governments do when they do not have any fiscal policy to improve revenue, but still have to pay wages and support government programs: borrow what it can, print more money and raise government employee salaries.  Both of these lead to greater inflation and continue to see Egypt's pound shrink in value.  Meaning that, even if those calling for a minimum wage of $1200LE actually get their demand in the near future, it will be likely only worth 2/3 the value that it is today and continue to shrink without any other cogent economic plan to inspire capital/income growth and reduce Egypt's debt.

Leaving aside the fact that the $1200LE suggested minimum wage does not seem to be tied to any economic factors aside from a report on current living wages (which is the big elephant in the room), setting a minimum wage has a few other issues that is not being discussed among any of the political and revolutionary groups.  First and foremost, a minimum wage will only effect those who are officially on either a government or corporate payroll as full or part time employees where the law for a minimum wage can be enforced.  A minimum wage will not effectively impact the 43% who are "day laborers" or part of the "informal economy".  

This group works "off the books" and those wages are set completely by the availability of workers versus the availability of jobs.  This is a true "supply and demand" economy where the supply of available workers (low skilled or otherwise) out strips the number of available jobs estimated at approximately a six to one ratio (in good economy), possibly higher now that the economic down turn is affecting things like tourism and building projects.  Two industries that are the backbone of the informal "day laborer" economy in Egypt.

There may be a minimal economic improvement in this sector as those with improved wages are able to afford additional comfort and food items or services that allows some money to flow into the informal sector.  This will quickly be out flanked by inflation, currently rising at 10% a month.  If inflation continues at it's current rate, even a $1200LE minimum wage will not be able to compete with rising costs or sustain the approximate 23% of workers it is aimed at.  

Second problem, in the current Egyptian economy, setting a minimum wage, or at least one that arbitrarily raises lowest income rates by three fold, can effectively bring economic growth to a grinding halt.  Most of those focusing on minimum wage have their sights set on big corporations or medium size factories where there may be opportunities for increased wages for lower scale or low skilled employees.  In larger corporations, like Sawiris' Orascom, an increased minimum wage may be absorbed.  Typically, those organizations have less low paid jobs than a factory or a building project.  

Where growth can be slowed for larger corporations would be the costs of expansion, such as new building sites or infrastructure where the cost of labor could become a drag on that growth.  It would not necessarily damage growth or prohibit growth as such organizations are in a better financial situation to absorb those costs.  Those companies would be more cautious about expansion and the number of projects could slow.  This would necessarily slow employment and revenue/income growth across the economy.  This may be an acceptable trade if the impact of a minimum wage could be felt across the board of the employment sector, increasing disposable income, and did not do any further damage.

Where the problem lies in Egypt is not the large corporations where concentration is on educated and skilled labor, necessitating a higher, competitive wage.  It lies in factories where the average worker is working for a pittance and the factory owners/investors have become very wealthy without investing much of it back into it's infrastructure or work force.  These last enjoyed the unwarranted backing of government, including and often the disparagement of the work force or unions by physically breaking strikes or providing minimal appeasement of demands.  Because the government was involved, these demands did not achieve any significant improvement, nor were there any over all pressure on the factory owners to improve conditions or wages.  

Worse, government interference allowed these business sectors to monopolize the industry and destroy any hopes of competition.  Competition isn't only good for the reduction of prices of goods to the consumers, competition means that companies have to compete for skilled and non-skilled labor.  That competition improves the amount of wages and types of benefits offered to draw needed employees from other employers.  It also means that established employers are pressured to provide better wages, benefits and work space to maintain their work force.

Where government allows a monopoly, competition, thus, wages, are stagnated.  Government control of monopolies and protection rackets or tariffs, represents an absolute destruction of competition and leaves any improvement in wages at the hands of government.  Government that will then have to act as an interested owner that, by design, is looking for the largest income into it's coffers and where the only pressure to improve salaries comes every few years during election seasons.  This makes competitive wages nearly non-existent and insists on an uneven growth in comparative income between nationalized or monopolized industries and private industries.  Increasing, instead of decreasing, the wealth disparity while destroying over all economic growth.

Worse, where government is involved in fixing monopolies, prices or wages, business owners turn increasingly to government to offset the pressures on wage control or defeat competition.  They do this by providing donations to elections or lobbying to insure that the government works in their favor instead of responding to competition in the consumer and labor market.  This is reality, not theory.  This occurs in many developed nations as well as underdeveloped nations.  In developed nations, the problem is partially offset by the prevalence of the private sector and the competition it creates with government interests or parties using government.  However, it still impacts over all growth negatively.

At every turn of government interference, including regular increases of minimum wage, competition is squeezed and real growth of private income/wages, as well as economic growth of a nation, slows.  Basically, private capital investors and would be owners, those who would be risking the capital for this growth, see no benefit in starting up or growing a business where that growth is restrained and the benefits of taking that risk are controlled or confiscated by the government.

Where the true danger in an arbitrary minimum wage exists is in the crushing of small businesses.  These businesses are typically between five and twenty employees.  They do not have a great amount of spare income or profit.  These businesses are also typically the type most often to appear and provide jobs, serving the needs of a community.  These would include restaurants, boutiques, small pharmacies, etc.  A minimum wage that does not take into account the actual income/revenue of these businesses and the number of people they employ will effectively crush this very important economic sector.  

In these businesses, with little spare income, a raise in minimum wage or an increase in taxes along with reduced revenue means that they will have to address their day to day financial means and needs with a sharp knife.  In business, factors such as leases, loan payments and utilities are generally "fixed costs" that the business cannot change without shutting down or defaulting.  Cost of products and materials are "variables".  They are impacted by inflation and any rise in transportation or wage costs to the supplier.  That increases costs to the business and effectively reduces available funds/revenue for wages of employees, profit for the owners or potential increase or improvement of capital assets (such as new stoves, refrigerators, property improvements, computers, etc).  

Labor costs are the most flexible aspect of any company's ledger.  Fixed costs, like leases, loans, utilities, do not change and cannot be effectively changed by any quick or short term action.  Costs of products and materials can be minimally impacted by shopping for new suppliers, but the over all cost savings hardly impact the bottom line or profit.  Where most businesses, specifically small businesses, can make an immediate impact on the loss of revenue is in labor.  That typically results in lay offs and increased unemployment.  Where an arbitrary high minimum wage is set that increases the cost of that labor above potential revenue growth, businesses will have to immediately adjust.  That means lay offs and increased unemployment and, generally, increased prices of goods sold to offset increased costs.

That brings the minimum wage issue full circle in the vicious cycle of Egypt's economy.  The third problem is the impact of a set minimum wage, much less an arbitrarily higher rate, on inflation.  It is very simple.  A higher minimum wage means higher prices.  In order to increase revenue to cover this expenditure, particularly where potential growth is stagnated, businesses have to increase the prices of their products.  That means that whatever good the minimum wage was supposed to obtain by providing more income to purchase basic necessities like food, clothing and even housing, will be mitigated (disparaged, negated, reduced) by the increased cost to purchase these items.  Inflation.  Skyrocketing inflation based on Egypt's current rate of inflation at 10% per month.

In the vicious circle, when government is also constrained to pay this wage and where revenues or tax income is reduced due to a down turned economy, it only has four options: increase taxes, lay off workers, borrow more money or print more money.  All of which are detrimental to the over all economy.  Borrowing money and increasing debt as well as printing money, down grades currency.  In Egypt's case, the pound is already shrinking at an alarming rate of approximately 1LE per month against the US dollar (which is also decreasing in value, making Egypt's pound even weaker).  

The bottom line is that setting a minimum wage can damage economic growth.  Setting an arbitrarily high minimum wage is self-destructive.  The only way out of Egypt's current problem is private sector growth and increased full and part time employment, reducing the informal economic day labor sector and insuring better and stable wages.  When the informal employment sector is reduced, that means that companies employing day laborers will have to compete for a scarcer resource.  When there is more competition in that sector for wages, over all wages or personal incomes will increase across the board.

The problem now is that the revolutionaries have all but promised this minimum wage ($1200LE) increase to the underclass that came out and supported them in Tahrir Square.  They cannot default on this promise without defaulting on their common contract.  If that happens, the revolution in Tahrir will look like a picnic compared to the possible riots for "bread and wages".  That would likely cause whatever democratic and free state they hoped for to come to a screeching halt.

At the same time, implementing that wage (along with the demands for nationalizing some privately owned industries) without any other forward economic policy will be shooting themselves in the foot.  It will slow economic growth and increase inflation and unemployment.  In the end, putting Egypt's economy on a five to ten year hiatus and making the revolution as suspect as the old regime when it comes to effectively running the country's economy.


It is difficult to say whether the IMF will be happy with the new Egypt. On the one hand, the demands for accountability may see reduced corruption–something all parties will appreciate. However, what appears more likely is that whatever government emerges from the revolution will find that corruption still ineradicable, and will take the easier step of increasing subsidies. As Ghonim hinted, the role of rising prices in the unrest cannot be overstated; the new regime will have to consolidate its power and will find increasing subsidies to be an easy way of doing just that. This risks restoring an element of unsustainability that will surely make international lenders unhappy.
And slow the economy even more.

There is no magic wand to cure Egypt's economic woes.  Those relying on increasing the minimum wage, nationalizing previously privatized industries and some how regaining "stolen" money from previous regime members and associates are going to find themselves staring at an empty Egyptian bank account and wondering what to do next.

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