Economist behind Caritas report: minimum wage a ‘social not economic concept’

An economist who formed part of the team of experts who drafted the Caritas report recommending an increase in minimum wage, has stated the proposal to raise low-income earners' basic wage was based on condition that no other wages increase.

Speaking to MaltaToday, veteran economist Karm Farrugia, reiterated his belief that minimum wage should be gradually increased by €10 this year, to a level commensurate with the Caritas recommendations that suggested a €26 increase to the monthly minimum wage of €153.

However he made it clear that any increase in the minimum wage should come into force on one condition. "The Caritas report lays down one condition, that is other wages cannot increase," Farrugia said.

Both the Nationalist and Labour parties are at loggerheads over the issue of minimum wage, after Opposition leader Joseph Muscat said the party would not increase minimum wage if this would lead to businesses raising prices, ultimately eroding the effect of increased salaries.

On its part the PN accused Muscat of promoting a "minimum wage freeze", leading Muscat to sue Lawrence Gonzi for libel, over allegations that he was advocating a freeze on the annual cost of living allowance increments.

No government has raised the minimum wage since 1987, except for the annual COLA increase which is pegged to the 12-month inflation rate during every government budget. Last year's increase was of €1.16 every week.

On his part, Karm Farrugia puts the number of persons on a minimum wage of just above at around 6,300.

"The concept of a minimum wage is chiefly a social concept and not an economic one. Any repercussions on the economy due to an increase in minimum wage should be secondary," Farrugia noted.

He pointed out that the minimum wage is a precautionary measure which is in place to protect workers from greedy employers. 

Labour leader Joseph Muscat claimed that reducing the utility bills would instead boost the purchasing power of workers, but Farrugia shed doubts on the effectiveness of such a measure.

"Although I doubt the possibility of reducing tariffs in such a speedy manner, the issue is irrelevant to the minimum wage increase. Such a measure will affect the whole country and has nothing to do with increasing the spending power of families on a minimum wage."

The Caritas study, published earlier this year, showed that utility bills represent less than 6% of the annual consumption bill of a family composed of two adults and two children and just 5.4% of that of a single parent family. 

On the other hand, the same study recommended a 14% increase in the minimum wage meaning that even if utility bills are sharply reduced this won't suffice to make up for the kind of wage increase recommended in the Caritas report.

Despite being in complete agreement over not increasing the minimum wage, both the PN and PL are now in a war of words over the alleged 'wage freeze'.

The Caritas study, 'A Minimum Budget for a Decent Living', concluded that the minimum essential budget for a household of two adults and two children is estimated at €10,634, a lone parent and two children at €8,581 and for two older persons at €6,328.Caritas proposed that statutory minimum wage increases from around €150 per week to at least €180.

Speaking to MaltaToday, economist John Cassar White said an increase in the minimum wage "completely depends on the state of the economy."

The former Malta Shipyards chairman said that in the context of Malta's sluggish economy such an increase could do more harm then good.

"A wage increase would enhance people's spending power but in a weak economy, people might choose to spend money on essential needs and save any extra money.

"A minimum wage increase in the context of a weak economy will raise the costs of employers and small operators, resulting in companies not engaging new employees or even employ persons on the black economy.

"In our current economic state, the government can look at other measures to boost the spending power of families. There should be a drive to encourage people to move out of the black economy and government should also look at ways and means to reduce employment costs," Cassar White said.

The Caritas report shows that the major part of the minimum expense (52.3%) of a family goes to food. According to the study, low-income families annually spend more money on public transport (€728) than on utility bills (€630).

Cassar White cites a reduction in national insurance nce payments as one way to encourage people to emerge from the black market. The economist pointed out that the current NI capping should be removed as people earning €50,000 per year do not pay much more NI then people on a minimum wage.

"People who earn more must pay more NI. Calibrating national insurance payments should not be something to be scared of. The same should apply to the reduction of utility bills. Any reduction in utility bills should firstly aid people who consume less.

"It makes ecological and economic sense to have people who consume more energy, pay more. Apart from improving the spending power of workers, a calibrated reduction in water and electricity bills would also ease the pressure on employers and reduce their operational costs."