Bolivian Economy, COVID-19 and salary increase

By: Beatriz Muriel

In the midst of the health and economic crisis, the policy of salary increases has once again become part of the public agenda. In Bolivia, it is enacted every May 1st to commemorate Labour Day (May Day). The Bolivian Workers’ Union (COB Central Obrera Boliviana) has called for a 5% increase in the basic salary and national minimum wage. Some of its members are even demanding 10%. However, the formal business associations have rejected any salary increases.

Photo: Bolivian Economy, COVID-19 and salary increase.

Both positions appear to be legitimate in terms of these organisations’ mandates to look after their members. Both can be considered fair or sensible. However, the perspective of labour policymakers should not be biased towards one or the other sector. Rather, it should be broad, taking into account the entire working population, as well as the country’s economic situation, to implement less costly and more effective measures (in social and economic terms).

The few evidence-based studies that exist for Bolivia show that a de jure salary increase reduces the demand for formal employment (i.e., subject to all labour rights conferred by law). When it does not derive from inflation or improved productive performance, it generates informality and unemployment. For example, the double Christmas bonus measure, implemented in 2013, implied an increase in the formal business payroll. It was one of the factors that caused the percentage of the employed population benefiting from this bonus to decrease from 19.4% in 2013 to 14.9% in 2014 (estimates based on Household Surveys).

In fact, salary policy has moved in contradiction with Bolivia’s labour scenario. Real labour income has fallen, and unemployment has risen, as a result of low productive development. For example, in 2011, 55.1% of the country’s workers had a labour income at least equal to the minimum wage (measured in hours) and as of 2019. This percentage fell to 42.6% (estimates based on Household Surveys).

In 2020, the health and economic crisis further deteriorated the labour scenario, with higher unemployment, underemployment and possibly informality, making wage policy even more cost-effective. In this context, salary increases should take into account five main aspects:

First, inflation increase – which allows maintaining a salary’s purchasing power – and which reached 0.67% in 2020 (according to the National Institute of Statistics).

Second, labour productivity (i.e., output per worker), whose highly optimistic estimate predicts a negative rate of -2% in 2020. It thus implies a higher labour cost in terms of benefits.

Third, the drop in domestic sales and production, with fewer formal companies able to take on any wage increases compared to, for example, the economic boom period.

Fourth, the country’s difficult fiscal situation, with high deficits inherited from 2014, severely limit any increase in current public spending via higher public salaries.

Finally, the persistence of health and economic problems for several months to come.

With the exception of inflation, the aspects described above show that, at this particular juncture, a salary increase policy, although it may favour a group of workers, will only favour a small group (14.9% of the employed population, according to the bonuses indicator). It will imply high costs in terms of the net destruction of formal employment and an increase in unemployment and informality, with a very likely negative net benefit from a socio-labour perspective.

This article was originally published on Página Siete.

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