Five reasons not to raise the basic salary of 2022

We return to the discussion of every year. To raise or not to raise the Basic Salaryor Unified (SBU)?

One of the studies of the recent Nobel Prize in Economics, David Card, showed that an increase in the minimum wage does not always have negative results on the labor market.

In fact, it can be quite positive. That is why each case must be analyzed carefully and taking into account the particularities of each economy.

What about Ecuador? exist five reasons to not raise the SBU:

1. Labor productivity and inflation have not increased. In a competitive economy, wages rise as a function of inflation and growth in labor productivity. That is the reason why in some countries of the world the minimum wage is set through a mathematical formula that takes both factors into account. In Ecuador the SBU has been set on a discretionary basis, juggling macroeconomic figures every year. Thus, while labor productivity has grown by just 4.9% since 2008, the minimum wage has increased by 100%. Even if the inflation-adjusted minimum wage is taken, the growth is 52%. In any case, much higher than the increase in labor productivity.
2. The minimum wage is similar to the median wage. This is important because in other countries the fact that the minimum wage is lower than the average wage is a sign that the former should go up. In this way, workers with less bargaining power could enjoy a salary according to the evolution of the economy. This is not the reality of Ecuador. Here the minimum wage is high enough for the market.
3. For now, the minimum wage is enough to cover basic needs. This is an issue that makes union members uncomfortable, since they are left without their only argument: “The current basic salary is not enough.” According to the statistics of the National Institute of Statistics and Censuses, a representative household of four members with 1.6 recipients who earn basic remuneration, is able to cover the cost of the basic food basket, which today stands at USD 712. In fact This situation has been taking place since 2018. I note that this analysis is exclusive for people who earn the basic salary, since the reality is that in Ecuador a large part of the population earns less than that. But this problem has its roots in the lack of adequate employment and in the rigidity of labor laws, but not in the fixing of the SBU.
4. We have the second highest minimum wage in the region. When a foreign company decides to invest in a country, it evaluates, among other things, the labor cost. Why would a foreign investor open a factory in Ecuador if there are neighboring countries where the salary is lower? So, is it optimal to have the lowest basic salary in the region? Either. But the fact that we are a country that urgently needs foreign investment and more jobs makes us question whether having the highest salary is in line with economic and social development.
5. There is evidence that the minimum wage has deteriorated formal employment in Ecuador. Recently, a academic study about the impact of the basic salary increase in 2008. It increased from USD 170 to USD 200 at that time. Two important results: i) The increase in the SBU decreased hiring by companies, and ii) The new SBU decreased the probability of remaining employed.

Finally, raising the basic salary to USD 500 over four years was a campaign proposal from President Guillermo Lasso.

Whether or not the president should begin to fulfill his promise is a discussion that I leave to political strategists, but it is clear that the economy does not allow for a salary increase.