Does minimum wage mean minimum benefit for Egypt?

Ahmed Feteha, Tuesday 7 Jun 2011

Campaigners have long called for a revision of Egypt's paltry minimum wage. But with a LE700 base level set to become reality in July, concerns are being raised about its possible effects on inflation and productivity

Wage protest
Egyptian police officers protest for a wage rise earlier this year (Photo: Reuters)

“I've been working for five years now and I'm still paid less than 500 pounds a month,” says Yasser Mohamed, a 30 year-old meter reader.

Yasser’s job entails stopping by houses in the middle class district of Medinet Nasr in Cairo, reading electricity meters and collecting payments door-to-door. He is just one of the 1.9 million Egyptians set to benefit from a new LE700 minimum wage that will be introduced on 1 July.

Unlike Yasser, millions working in the private sector are unsure if they will benefit from this decision.

Egypt’s interim cabinet has approved the LE700 minimum wage for public sector employees; a bold step and something Egyptians have been campaigning for long before the ouster of President Hosni Mubarak. Whether the private sector will see a similar base level imposed is still under discussion.

Egypt’s governmental sector, standing strong at around 6 million employees and comprising 23 per cent of public expenditures, is the one sector that is going to strongly benefit due to the relative ease of implementation.

The private sector, on the other hand, is wary of a potential new wage rate. Questions have been raised as to its implication for businesses and its economically viability.

Contrary to belief, average annual wages in the private sector are actually significantly lower than in the public sector; LE 23,660 for the public sector vs LE15,392 for the private sector in 2009, according to data from CAPMAS.

Magda Qandil, director of the Egyptian Centre for Economic Studies, believes that imposing the minimum wage will eventually harm the economy and employees.

“Those who will benefit from the rate have a high marginal tendency of consumption; all the extra income they will get will be directed towards consumption, which in turn will lead inflation to surge, rendering the raise in wages obsolete," she explains.

She adds that the private sector will tend to raise its prices as a result of the increased cost of production. “The private sector is already struggling after the revolution ... the government couldn’t have chosen a worse time.”

Qandil thinks that Egypt might end up giving the “illusion” of social justice while workers are actually worse off. “Such regulations are applied worldwide after proper examination of different economic sectors, different job requirements and availability of skills in the market,” she says.

For their part, businessmen are divided on the wisdom of introducing the minimum wage.

“I believe that the proposed rate is a very reasonable starting point,” says Farid Khamis, head of the Egyptian Investors Federation and Chairman of Oriental Weavers, the largest rug and carpet manufacturer in the world.

Khamis disputes the idea, propagated by some businessmen and Ahmed Nazif’s former government, that setting a high minimum wage would hurt local industry due to low productivity. The veteran industrialist claims that low productivity is a management issue in the first place.

“Industries that say they cannot pay this minimum wage are probably having managerial and organisational problems. They are the ones who should be improving their methods to boost productivity," he explains.

Khamis argues that raising wages would have a positive impact on labour productivity “A skilled laborer cannot be productive unless he is paid an income that allows him to maintain reasonable living conditions,” he says.

But his view is very different than that of other businessmen, who think that raising wages would simply eat up their profits and that productivity is virtually independent of wage, especially when it comes to low-skilled labour. Academic studies also dispute Khamis' view.

A 2011 study by the Economic Institute of the Pontifical Catholic University of Chile concluded that total productivity was negatively affected when a minimum wage was imposed on Chilean industry.

The study indicates that, as plants were unable to layoff less industrious, unskilled labour due to the high severance payments mandated by the law, they were forced to keep undesired, low-skill labour which affected plant productivity.

Another study by the National Institute of Economic and Social Research in the UK found little evidence to suggest that the introduction of a national minimum wage there boosted overall productivity in lower-paying sectors.

The study suggested several explanations, one of which was that businesses resorted to raising prices to compensate the growth in costs, instead of working on improving productivity.

In Egypt, it seems that smaller-sized businesses find their ideas tallying this study's findings.

Hesham Tolba, chairman of El-Rowad Engineering Company, a 50-employee firm specialising in sales and maintenance of copy machines, expressed concern that higher wages might not match productivity rates in his business.

“The technical staff in my company are already paid more than LE700, the main problem is in petty jobs,” he says.

“A good proportion of my employees just photocopy papers all day. When I subtract the new wage and fixed and variable costs from their productivity I'll end up making a loss on each of these employees.”

Tolba said that he may resort to raising prices to compensate the extra costs as his margins are inflexible.

Another issue raised by Tolba is social insurance. Like many, he is unsure whether the proposed LE700 will be insurable or not.

Only 45 per cent of those working in the private sector are insured. Private employers usually set a small basic (insurable) salary to be able to pay their employees higher salaries without incurring higher insurance costs.

Smaller entities complain the most of the wage rate where salaries are smallest and labour is generally unskilled.

Islam Hassan, owner of a three-seater-barbershop in the upscale neighborhood of Heliopolis, expressed great dismay when he was informed about the wage rate. “There is no way I am going to pay the guy who cleans the shop 700 pounds. I will just clean it myself,” he says, furious. “If this actually happens, everybody, including myself, will raise prices.”

Some countries exempt certain sectors and certain kinds of employment from the minimum wage. North Korea, for example, exempts businesses hiring less than 10 employees. Canada on the other hand excludes farm workers from the regulations in some provinces.

Similar details for Egypt's minimum wage haven’t yet been announced.

Informal employers like Hassan absorb a significant portion of the workforce in Egypt. Two-thirds of those working in the private sector are informally employed, including the majority of blue collar workers in small workshops, manual labourers and day labourers.

Any real wage reform will, therefore, need to tackle the problems of Egypt's informally employed.

Enforcement of the minimum wage

The issue of compliance to the wage, especially among small and medium-sized enterprises (SME), is the biggest challenge the government will face. Observes worry that businesses will resort to informal employment to get around the minimum wage; especially likely as the supply of labour exceeds demand in Egypt.

Abdel Fatah El-Gebaly, advisor to the finance minister, told Ahram Online that the Ministry of Manpower represented in the Higher Council for Wages will be seeing to the enforcement of the wage rate on private sector entities.

However, enforcement isn’t enough to ensure compliance, especially among SMEs.

The ILO suggests in its 2009 wage report that “Well-tailored, awareness-raising campaigns, in cooperation with employers’ and workers’ organizations” is an effective way to address the problem.

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