Wednesday, June 19, 2024

Managing carefully implementation of minimum wage, employment tax reduction

The celebration this week of the International Labour Day was marked by the customary call for the establishment of a minimum wage and the lowering of employment tax. Fixing a minimum wage been one of the key demands labour unions have been making for decades now. The salaries of civil servants have always been set by the government. However, there has never been a national minimum wage policy in the country so far for both public and private sector workers governed by the labour law. As a result, the majority of these workersearn wages that they simply cannot live on. A slew of surveys undertaken by the likes of the national statistics agency and the International Labour Organization consistently indicate that around half of the employed people in Ethiopia are poor. The astronomical hike in inflationary pressure, exacerbated by a multitude of factors including, among others, political instability, internal displacement, drought and global food price increases, has made it difficult for these workers to make ends meet and lead a decent life.

The long-standing calls of organized labour in Ethiopia as well as the ILO for the determination of minimum wage by law was finally given recognition under the labour law of 2019, which enshrined its legality and mandated the establishment of a Minimum Wage Board— comprised of representatives from the government, employers, trade unions and civil society stakeholders—that is tasked with fixing and periodically revising the minimum wage with due regard to such factors as the country’s economic development, labor market conditions, and other relevant considerations. A number of steps have been taken towards this end. Chief among them is the formulation of a roadmap for implementing a sustainable minimum wage system in Ethiopia. Although, as part of this effort, draft regulations defining the powers and responsibilities of the Minimum Wage Board were prepared and submitted to the Council of Ministers, the progress to date has been minimal to the say the least. Aside from entreating with the government to set a minimum wage, the Confederation of Ethiopian Trade Unions (CETU) has been asking for some time for a reduction of the income tax deductible from employees’ salaries, arguing the benefits accruing from it will help ease the economic hardships workers face.

Determining a minimum wage in Ethiopia, like in many other countries, carries both advantages and disadvantages.In the Ethiopian context, where poverty levels are high, and income inequality is a pressing issue, the upsides it offers include ensuring decent living standards; boosting consumer spending that in turn leads to higher sales for businesses, job creation, and overall economic growth as well as improving productivity, quality of work and employee satisfaction, which ultimately benefits businesses and the economy as a whole. This said there are downsides associated with requiring employers to pay a floor wage.

One of the main concerns associated with implementing a minimum wage is that it may lead to job losses, especially in sectors with tight profit margins or high labor costs. If employers cannot afford to pay the minimum wage, they may be forced to reduce their workforce, cut hours, or automate certain tasks, resulting in unemployment or underemployment for some workers. Setting a minimum wage above market rates can lead to inflationary pressures in the economy. Higher labor costs for businesses may result in increased prices for goods and services, which can erode the purchasing power of consumers, especially those on fixed incomes or with limited financial resources. Moreover, it may well force small and medium-sized enterprises (SMEs) in Ethiopia, whichoperate on thin profit margins, to absorb the higher labor costs associated with a minimum wage, potentially leading to closures or downsizing. Furthermore, it may inadvertently incentivize more businesses to operate in the informal sector to avoid compliance with wage laws, undermining the effectiveness of the policy.

Similarly, lowering employment income tax similarly hasvarious benefits and drawbacks. The distinctive advantage of lower income tax is that it enables employees to take home a larger portion of their earnings. This can improve overall living standards, increase consumer spending, and potentially reduce poverty levels in the country. At the same time, though, it is likely to prompt a potential loss of government revenue, creating budget deficits that detrimentally affect the government’s ability to fund essential services such as healthcare, education, and infrastructure development at a time the economy is beset with a bevy of grave challenges.

The twin issues of establishing a minimum wage system and reducing the tax burden of workers have remained largely unaddressed despite the government’s expressed commitment to implement them in the short term. Admittedly, they are complex undertakings that involve weighing economic, social, and political factors to ensure fair compensation for workers suffering under the weight of a backbreaking rise in the cost of living while maintaining competitiveness and economic growth. As such it’s of the essence to strike a delicate balance between their pros and cons so as to ensure their implementation does not exacerbate the very problems they are expected to tackle. In fact, they should be part of a holistic economic strategy that is intended to bring about long-term sustainable development and equitable distribution of resources.

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