PAKISTAN: Minimum wage: federal versus Punjab

A minimum wage of 8,000 rupees announced by Prime Minister Gilani and 9,000 rupees by Chief Minister Shahbaz Sharif is being viewed as a race between the two major parties in the country to lure labour's support. Setting a minimum wage is a federal as well as a provincial subject. Monthly minimum wages are recommended by the federal government and set by the provincial Minimum Wage Boards (MWB), empowered under the Minimum Wages Ordinance 1961 to fix a minimum wage. Thus there exists a national minimum wage but the Punjab government website indicates that the provincial government also fixes minimum wage rates that differ between industries and skills. Thus neither man went beyond his mandate, however setting a minimum wage is an exercise that governments indulge in with the objective of ensuring that the amount earned is a fair recompense for a labourer's output within the larger macroeconomic context. The critical element ignored by both the Prime Minister and the Chief Minister is the existing macroeconomic context. To put it succinctly, there is little cause for complacency with respect to our current macroeconomic situation. The balance of payment position continues to weaken due largely to the commencement of the repayment schedule of the International Monetary Fund's 2008 Stand-By Arrangement, the decline in our exports due to continued loadshedding, and a rise in our import bill due to the rising international price of oil. Additionally, the SBP report notes that the "real issue is the government's inability to implement fiscal reforms, and in some cases, not even being able to secure the required legislation. The implementation of the reformed general sales tax; the broadening of the income tax net to include agriculture and services; the phasing out of subsidies in a timely manner; and the restructuring of loss-making public sector enterprises - were either delayed, or not implemented. The year-on-year increase in taxes is higher by 25.8 percent in the first 10 months however, with the economic slowdown, the target for this full year appears to be unachievable." Thus in the existing macroeconomic context, any attempt to increase salaries would have negative repercussions on the economy through fuelling what is defined as wage-push inflation, with more money in the economy through wage-rise relative to output. In addition, the decision to raise minimum wage may also account for a prospective investor to defer his decision to invest till inputs are available at competitive rates relative to other regional countries or, in the case of a different minimum wage in Punjab and the rest of the country, to locate where input costs are relatively lower. In short, political point scoring with respect to the minimum wage is likely to benefit neither the centre in increasing productivity nor indeed the province in luring prospective investors to locate there. Pakistan is currently in the throes of stagflation with high rates of inflation and stagnating growth levels. One policy announcement that is considered an anathema to effectively dealing with stagflation is not to raise salaries till such a time as the economic growth rate picks up - a rate that has the capacity to absorb the income rise without impacting on the growth rate. For the Prime Minister and the Chief Minister to announce a pay rise at a time when our industrial productivity is declining, attributed largely to severe energy shortages negatively impacting on industrial as well as farm output, due to inability to provide gas to the fertiliser industry, thereby compelling the government to import fertilisers, is simply not justified. A better option would have been to focus on raising the disposable income of labour through controlling inflation and increasing productivity through implementing appropriate fiscal and monetary policy measures.