The definition of the minimum wage in Colombia has, as it does every year, a leading role for millions of people and households, but it will be especially key for the future of the economy in what is to come in 2024.
It is not for nothing, for example, that the Board of Directors of Banco de la República mentioned that this is one of the variables that will dominate the actions of the country’s monetary policy in the short term. This «in such a way that its increase does not significantly exceed the annual variation of the CPI in 2023» and considering «the gains in purchasing power obtained in 2023 and expected in 2024 as a result of the expected drop in inflation».
In practice, the Bank of the Republic assured that the figure defined by the Government unilaterally will have to look beyond the workers’ pockets.
Importance of the 2024 minimum wage in Colombia
In fact, in the minutes of the most recent meeting, the Board described it as the most immediate risk to what could happen to interest rates, given that Colombia has a «highly indexed» economy.
In other words, if there is a very strong increase in the minimum wage by 2024, the central bank could halt the interest rate cut that began in December and which took rates from 13.25% to 13%.
This was stated by Fedesarrollo chairman, Luis Fernando Mejía, who affirmed that, although it is unlikely that rates will rise again, a «hand brake» could be applied in their reduction. And he agreed Banco de la República Board that this would happen because in Colombia, there is an important group of goods and services that are tied to this indicator. Consequently, a new increase in prices could be generated and from there Banco de la República «surely» would have to put a pause to the reduction of interest rates.
Risks of a large-scale hike
If a different scenario occurs -with a moderate wage increase-, for Mejía, there is no doubt that the central bank will continue to lower cost of money during first half of 2024 and give a respite to economic growth.
Behind this forecast there is a latent risk that inflation -which has been falling and is at 10.15 % per annum as of November- may slow its fall and rise again, but also that it may have a negative impact on the generation of formal employment in the economy.
On the one hand, Fedesarrollo CEO states that this year, unlike the previous two, there is no room for the minimum wage to increase much above the Consumer Price Index (CPI) and, therefore, a strong increase in the minimum wage would have consequences not only in the process of price moderation but also a deterioration in colombian labor market during 2024.
Effects on employment and unemployment
This is due to the fact that higher costs will be generated for the private sector, the generation of formal jobs slows down, and encourages people to abandon their search for employment in conditions and turn to informality, where remuneration is lower and conditions are more adverse.
Moreover, Luis Fernando Mejía indicated that the strong increases in 2021 and 2022, which were 10.07% and 16%, respectively, generated higher fixed costs for the Colombian business sector and put pressure on the creation of formal jobs in the economy.
According to DANE figures, between January and October 2022, 3.7 million people had incomes of one minimum wage while, in the same period of 2023, this figure was reduced to 2.5 million.
Meanwhile, those receiving less than this value went from 9.6 million to close to 10.5 million.
«While very large increases particularly benefit those who have a formal job, they also become a barrier to access for those who aspire to find a formal job and who are paid less than a minimum wage, about 50% of the employed population,» said the Fedesarrollo expert.
And he added that it is not surprising that large increases «have led to an increase in the proportion of people earning less than the minimum wage, because income does not move by decree».
Finally, bank experts say that, «in an economy that is slowing down, a very significant increase in the cost of labor may mean that companies do not have the capacity to transfer this increase to the market because demand is not going well; and this may generate an increase in unemployment, especially in sectors that are intensive in unskilled labor».
Source:
- Capital Inteligente, Bancolombia, December 2023
