Minimum prices will rise

The government’s initiative to increase the minimum wage to one million pesos is a policy decision; it is popular and has been endorsed by business and worker sectors. It is a measure aimed at stacking demand and strengthening reactivation, in line with the policies adopted to confront the economic and social effects of the pandemic. Its possibilities of generating unemployment are not so obvious, but the increase in inflation that it causes can be.

With inflation expectations close to 6% at the end of the year, maintaining demand dynamics required an adjustment to the agreed level. The rebound of the economy with an expected growth of close to 10%, after a fatal 2020, has exceeded expectations and it is objective and fair to acknowledge the battery of policies, stimuli and aid that the government promised -including the plan of vaccination- and that have largely resulted in the unprecedented growth of GDP that we have observed.

Once again, we have verified that the intervention of the State to mark the demand, as in other episodes in history, has been successful. Thanks to this and a uniform response from almost all governments, although with different tools and magnitudes, the world remains afloat even without the end of the pandemic. The main protagonists have been the State, boosting the economy, and science, whose vaccines have made it possible to regain confidence. Colombia, regardless of electoral considerations, has acted responsibly in both areas.

Business sectors have invoked, as a negative consequence of the wage increase, the loss of jobs: increasing labor costs could present a tendency to reduce the creation of new jobs or, simply, to eliminate as many as possible to maintain the level of employment. utilities. Faced with this argument, we must consider that we are facing an exceptional situation that has required and will require exceptional measures, although a particular circumstance to consider is the high level of informality, close to 50%, and the importance of small companies as generators of jobs that they pay the minimum wage.

The contributions of Professor David Card, winner of the Nobel Prize in 2021, on the effects of variations in the minimum wage in the labor market, would indicate that its increase does not necessarily generate unemployment, contradicting the expected association of wage increases with improvements in productivity used traditionally. Professor Card’s theory, however, must also consider that we are, once again, in an exceptional situation.

One of the ways in which the increase in the minimum wage, in the current conditions of Colombia, could generate unemployment, refers to the greater loss of competitiveness of the industry and local enterprises in the face of international supply. Its results are yet to be observed, but, practically without any doubt, its adverse effects on inflation can be anticipated if there is no increase in the supply of domestic or imported goods.

Inflation will be an unavoidable effect. Rather than controlling punctual price increases, as established by one of the concertation mechanisms, the protection of the renewed purchasing power of wages must be guaranteed with a corresponding supply of goods and services and reasonable management by the monetary authority. . We are facing a scenario in which the economy and economic actors, by stimulating demand, must incite supply, inasmuch as experience has shown that price control mechanisms have a transitory effect, much more in monopoly conditions, such as it has happened in Colombia recently with some drugs.

The worst thing that could happen to our economy, in short, is not that the effect of the wage increase is to promote unemployment as some fear. Instead, we must refer to our ability to intelligently avoid the spiral that makes the fable of the carrot and the donkey the norm, with us, like donkeys, chasing price increases without ever reaching them.

@herejesyluis