On Egypt's minimum wage

Rashad Mahmood, an independent consultant and journalist who until last year was based in Cairo, sent me his thoughts on the campaign for a new minimum wage in Egypt. I agree with him that the inflationary impact of arbitrarily increasing the minimum wage is not being talked about enough. Nor are other issues: for instance, if the minimum wage is drastically increased, why not end the bonus system in place in many workplaces? And optional extra like additional months of wages that are paid out by some employers? A new wage system cannot only be about a living wage, it should also be about a clearer, enforceable system that provides labor flexibility and increases productivity. That's something missing from the public discussion thus far.

For a little background on the minimum wage in Egypt, last year an administrative court ruled that the government had been negligent in not holding a meeting of the Supreme Council for Wages, which sets the minimum wage, since 1984. The official minimum wage had thus been frozen at the ridiculous level of LE36 per month. The NGO that had filed the suit meanwhile issued a report that, based on cost of living estimates, the minimum wage should be LE1200. Business associations countered that it should be LE400, the government agreed, and I had bet that, were it not for the revolution, Hosni Mubarak would have decreed that the government should set it at LE500-600 as a pre-electoral populist measure. After the revolution, some labor activists even called for a new minimum of LE1500. For the moment, different wage levels are set for the public and private sector (which does not make sense to me) and many workers earn a good part of their income not from salaries but from bonuses. 

Here are Rashad's thoughts:

While it may sound appealing to institute an LE 1200 minimum wage in Egypt to ensure prosperity for all Egyptians, there are better ways to help the poorest, and it would lead to rampant inflation and reduce employment when Egypt needs to be hiring. As economists like to say, there is no such thing as a free lunch, and this is a clear case of that. 

To realize why, it is useful to think about what would happen to a business subject to the new minimum wage. Let's take a fuul and ta3miya restaurant, that has 3 employees, and they currently pay them each LE 600 per month. Meanwhile, the store has total revenue of LE 3,000 per month, so the owner is making a profit of LE 1,200. (We'll pretend there are no other costs besides labor to make the math easier.)

Now, when the new minimum wage law passes, the owner has several options. If he keeps his 3 employees, and doesn't change his prices, his costs become LE 3,600 per month, leading to a loss of LE 600 for him each month. That is clearly not sustainable, so he can do one of two things, either raise prices, which will contribute to inflation, and reduce the amount of product he sells, or fire one of his employees. Now replicate this across the entire economy and you begin to see the problem. 

Many economists would say that any minimum wage is bad, however the empirical evidence in most cases shows that as long as the increases are not dramatically above the prevailing wage, the minimum wage can be a useful tool for boosting incomes of the poorest. However, there are many Egyptians currently making as little as LE 300-400 per month, and in rural areas even less. Attempting to triple their wages by fiat is guaranteed to fail.

Of course, there is yet another option, the business owner could ignore the law and hire employees under the table. Many of Egypt's laws go unenforced in this way, but as the new government gets established, it should be trying to reverse the culture of ignoring the law, rather than reinforcing it. 

Are there businesses that could afford to pay their workers LE 1200? Of course there are, but we have to think about how the law applies to the poorest businesses as well as the richest.