Annual Indexed Minimum Wage: Misguided Tool

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by Ghassan Karam

The adage “Be careful of what you wish for, it might come true” highlights the need to be very cautious and deliberate in choosing an end as well as a means. For who wants to attain a cherished goal if that implies adopting wrong and illiberal policies that are antithesis of the goal sought. Even Machiavellianism would not advocate a means that could wreak more havoc than the benefits bestowed. Such a circumstance is similar to the empty and hollow Pyrrhic victory where the king of Epirus defeated the Roman army in battle but said: “If we are victorious in one more battle with the Romans, we shall be utterly ruined.”

Unfortunately for organized Lebanese labour, the latest raise in the minimum wage is being celebrated as a victory, which it is, had it not been attached to a provision of annual automatic increases tied to the rate of inflation. This automatic rise in the level of minimum wages poses a great danger to transform this accomplishment into a defeat for labour.

Indexing of wages, even minimum wages, is problematic for at least two reasons. (1) What is the index that is to be applied for the purpose of conducting such adjustments and does the country posses such a reliable objective index?   One issue to be clarified at the outset,is that an adjustment by a  consumer price index , CPI, does not make all its recipients whole as it is popularly alleged. Given two consumers Ali already owns a house while Elias does not and assuming that the largest component in the CPI is that of housing then a 10% increase in pay might help Elias not fall behind but it will be pure gain for Ali who has already purchased his dream house. As this very simple example illustrates there are a number of indexes that could be constructed and each could lead to a different result. That is why it is important to agree from the start on a specific index and who is going to be in charge of collecting the data for that particular measure. This is not a simple matter since Lebanon does not have the detailed studies to compose the baskets that are to constitute such measures. I still have to see the detailed composition of a Lebanese CPI. Furthermore the cost of living in Lebanon, as small as it is, shows considerable variation between regions and thus regional indexes are in order. But what ought to be of a great concern is the feature of automatic guaranteed rise in minimum wages. That automaticity could become the most damaging to the labourers at the bottom of the pyramid. If it so happens that the wages of  unskilled labour increases without a commensurate increase in its productivity then that would only lead to more unemployment among the low skilled and would exasperate the levels of poverty.

A constant level of minimum wages in real terms is an honourable goal worthy of achievement. That is not what is being questioned. It is the efficacy of the method used in order to achieve that noble goal. A cost of living adjustment , even if a reliable and fair index is available, must not be automatic since that introduces rigidity into the labour markets and because it assumes that all inflations are alike which ,we all know ,is not the case.  Economies, such as many of the southern European ones, are at times afflicted by negative macroeconomic data that demands a major effort to control wages  in order to regain competitiveness. Under such dire economic circumstances labour will be committing suicide if it demands a higher nominal wage when wage restraint should be the regimen. The phenomenon of cost push inflation or what has been called stagflation is no longer an aberration but is instead a possibility to contend with. Another equally troubling scenario would be that of an imported  inflationary environment combined with relative stagnation in the productivity of the economy where the general wage level is  stagnant. Under such conditions an automatic increase in the minimum wage would become a reward for being unskilled.

A society is best judged by how equitable is its distribution of income, once the skill level is accounted for, and how well it treats its underprivileged and poor.  These goals are to be promoted through a progressive income tax structure, greater expenditures on education and targeted growth policy. A rigid automatic increase in the minimum wage is not a substitute for the above. If this proposal is adopted as is then I predict that it will hurt those that it claims to be helping but the degree of the pain will not become clear until 5-7 years after its adoption.

May I humbly suggest a periodic thorough review , once every five years or so, of the status of the minimum wages vis a vis the rest of the economy instead of the straight jacket of an automatic annual increase.

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43 responses to “Annual Indexed Minimum Wage: Misguided Tool”

  1. Sebouh80 Avatar

    I agree with you Mr.Karam,

    Now allow me to ask who in the government proposed this ingenious idea that the minimum wages in Lebanon should be tied to a provision of annual increase in the inflation rate index.
    To begin with, since when did Lebanon have any reliable data of any kind, let alone to tackle the CPI wage index.

    The other issue that I would like to highlight is that we do not have any clear idea about the real unemployment rate in Lebanon which according to official numbers the figure is around 9 percent. Of course, these figures are misleading due to the fact that it does not take into consideration the substantial underemployment rate, and the Surplus Labor which is being continuously absorbed in the Gulf and other parts of the world. If we count these two factors on top of the government claims than no doubt the real unemployment rate would be much  higher. 

    Returning to the CPI wage question, The CPI is the consumer price index that reflects the general price of all commodities irrespective whether goods or services in a given year. The CPI index has always been a very complicated data even for advanced economies like US, Europe and Japan. Moreover, what is deeply troubling with the proposition of automatic wage increase each year that it creates an environment of permanent instability and will backfire on the Labor in the long run. The other thing that I would like to know is that what are the components of the CPI wage index which is not clear at the moment. Finally, I agree with the periodic thorough review once every 5 years or so concerning the minimum wage vis-a vie to the rest of the economy. 
    Notice governments in Lebanon never seriously implemented progressive taxation policy due to the class nature of all those who were residing over governments ever since independence of the country in question till present times.

    1. Ghassan Karam Avatar
      Ghassan Karam

      Sebouh,
                 There is potentially another very important issue which I did not mention on purpose because I could not ascertain its validity.I have been told by more than one person in Lebanon that the minimum wages do not apply to foreign workers in the country. If that is true then  that is another reason for Lebanese employers not to hire Lebanese nationals. That is madness, if true.

      1. 5thDrawer Avatar

        That would be like Mexicans in the USA. Another supposedly necessary evil taking away low-life jobs from Americans.

        1. Ghassan Karam Avatar
          Ghassan Karam

          Not quite the same thing. In the US and most other countries a minimum wage applies to all labour irrespective of any other criteria. Laws are supposed to apply to all residents  equally. You don’t want some driving on the right hand side of the road and others on the left hand side do you? 🙂

        2. leobetapar Avatar
          leobetapar

          this man liar to you there is minimum wage everywhere in the world even in China and Vietnam .Just depend how low is it

        3. 5thDrawer Avatar

          Gee Gassan. Let’s not get in to the driving … especially in a place they pick any side at any speed if there’s an opening to dive in to. 🙂

        4. 5thDrawer Avatar

          Gee Gassan. Let’s not get in to the driving … especially in a place they pick any side at any speed if there’s an opening to dive in to. 🙂

      2. Sebouh80 Avatar

        Well I guess the foreign workers like Syrian, Egyptian and Sudanese could be part of Marx’s famous industrial reserve army theory.

        Although this theory in our contemporary times could be more valid globally then nationally.

      3. Sebouh80 Avatar

        Well I guess the foreign workers like Syrian, Egyptian and Sudanese could be part of Marx’s famous industrial reserve army theory.

        Although this theory in our contemporary times could be more valid globally then nationally.

  2. Sebouh80 Avatar

    I agree with you Mr.Karam,

    Now allow me to ask who in the government proposed this ingenious idea that the minimum wages in Lebanon should be tied to a provision of annual increase in the inflation rate index.
    To begin with, since when did Lebanon have any reliable data of any kind, let alone to tackle the CPI wage index.

    The other issue that I would like to highlight is that we do not have any clear idea about the real unemployment rate in Lebanon which according to official numbers the figure is around 9 percent. Of course, these figures are misleading due to the fact that it does not take into consideration the substantial underemployment rate, and the Surplus Labor which is being continuously absorbed in the Gulf and other parts of the world. If we count these two factors on top of the government claims than no doubt the real unemployment rate would be much  higher. 

    Returning to the CPI wage question, The CPI is the consumer price index that reflects the general price of all commodities irrespective whether goods or services in a given year. The CPI index has always been a very complicated data even for advanced economies like US, Europe and Japan. Moreover, what is deeply troubling with the proposition of automatic wage increase each year that it creates an environment of permanent instability and will backfire on the Labor in the long run. The other thing that I would like to know is that what are the components of the CPI wage index which is not clear at the moment. Finally, I agree with the periodic thorough review once every 5 years or so concerning the minimum wage vis-a vie to the rest of the economy. 
    Notice governments in Lebanon never seriously implemented progressive taxation policy due to the class nature of all those who were residing over governments ever since independence of the country in question till present times.

  3.  Avatar

    I agree with you Mr.Karam,

    Now allow me to ask who in the government proposed this ingenious idea that the minimum wages in Lebanon should be tied to a provision of annual increase in the inflation rate index.
    To begin with, since when did Lebanon have any reliable data of any kind, let alone to tackle the CPI wage index.

    The other issue that I would like to highlight is that we do not have any clear idea about the real unemployment rate in Lebanon which according to official numbers the figure is around 9 percent. Of course, these figures are misleading due to the fact that it does not take into consideration the substantial underemployment rate, and the Surplus Labor which is being continuously absorbed in the Gulf and other parts of the world. If we count these two factors on top of the government claims than no doubt the real unemployment rate would be much  higher. 

    Returning to the CPI wage question, The CPI is the consumer price index that reflects the general price of all commodities irrespective whether goods or services in a given year. The CPI index has always been a very complicated data even for advanced economies like US, Europe and Japan. Moreover, what is deeply troubling with the proposition of automatic wage increase each year that it creates an environment of permanent instability and will backfire on the Labor in the long run. The other thing that I would like to know is that what are the components of the CPI wage index which is not clear at the moment. Finally, I agree with the periodic thorough review once every 5 years or so concerning the minimum wage vis-a vie to the rest of the economy. 
    Notice governments in Lebanon never seriously implemented progressive taxation policy due to the class nature of all those who were residing over governments ever since independence of the country in question till present times.

    1. Sebouh,
                 There is potentially another very important issue which I did not mention on purpose because I could not ascertain its validity.I have been told by more than one person in Lebanon that the minimum wages do not apply to foreign workers in the country. If that is true then  that is another reason for Lebanese employers not to hire Lebanese nationals. That is madness, if true.

      1.  Avatar

        That would be like Mexicans in the USA. Another supposedly necessary evil taking away low-life jobs from Americans.

        1. Not quite the same thing. In the US and most other countries a minimum wage applies to all labour irrespective of any other criteria. Laws are supposed to apply to all residents  equally. You don’t want some driving on the right hand side of the road and others on the left hand side do you? 🙂

        2.  Avatar

          this man liar to you there is minimum wage everywhere in the world even in China and Vietnam .Just depend how low is it

        3.  Avatar

          Gee Gassan. Let’s not get in to the driving … especially in a place they pick any side at any speed if there’s an opening to dive in to. 🙂

      2.  Avatar

        Well I guess the foreign workers like Syrian, Egyptian and Sudanese could be part of Marx’s famous industrial reserve army theory.

        Although this theory in our contemporary times could be more valid globally then nationally.

  4. leobetapar Avatar
    leobetapar

    At least this Karam speak clear,so wannabe chicago boy you wanna be the M.Friedman of the arabs.Tell me the guy on the city give more than the guy in washington or you wanna eat at the two place?i wanna know how much the different shit of the world (Nemrod of riyyad,the kenyan of washington,the big capitalist..) give you any time you right a piece of shit like this one

    1. Ghassan Karam Avatar
      Ghassan Karam

      leobetapar,
                     I suggest you clean up your language  and refrain from making silly allegations.

      1. leobetapar Avatar
        leobetapar

        my language is very clear great professor unfortunatly i don’t speak a perfect english.So tell me i wanna know how much Nemrod and the rotten crown of the peninsula give you.Don’t accept currency take all in god soon the occident will fall and $ will have no value

    2. Ghassan Karam Avatar
      Ghassan Karam

      leobetapar,
                     I suggest you clean up your language  and refrain from making silly allegations.

    3. Hannibal Avatar

      At least Mr. Karam writes and with logic and style. You Leo you crap from your mouth and talk from your a55.  lol

      1. leobetapar Avatar
        leobetapar

        you traitors with your viperes tongues know too much how to sell yourself your soul and your pride That’s not a shiite quality Karam make eulogy of Friedman that’s a pity

        1. Hannibal Avatar

          You have issues… You need psychiatric treatment dude. No honestly a consulto of psychiatrists won’t be able to treat your disease. It is a malignancy growing inside of your soul and it is called religious apartheid. All what I have to say is get that treatment. 

          1. leobetapar Avatar
            leobetapar

            you are really pretentious guy Religious apartheid LOLOLOLOL i am calling on Union of Mopnotheisme Arabs and more strange you absolutly don’t know what is my religion as usual you judge without knowing

  5. leobetapar,
                   I suggest you clean up your language  and refrain from making silly allegations.

    1.  Avatar

      my language is very clear great professor unfortunatly i don’t speak a perfect english.So tell me i wanna know how much Nemrod and the rotten crown of the peninsula give you.Don’t accept currency take all in god soon the occident will fall and $ will have no value

  6. At least Mr. Karam writes and with logic and style. You Leo you crap from your mouth and talk from your a55.  lol

    1.  Avatar

      you traitors with your viperes tongues know too much how to sell yourself your soul and your pride That’s not a shiite quality Karam make eulogy of Friedman that’s a pity

      1. You have issues… You need psychiatric treatment dude. No honestly a consulto of psychiatrists won’t be able to treat your disease. It is a malignancy growing inside of your soul and it is called religious apartheid. All what I have to say is get that treatment. 

        1.  Avatar

          you are really pretentious guy Religious apartheid LOLOLOLOL i am calling on Union of Mopnotheisme Arabs and more strange you absolutly don’t know what is my religion as usual you judge without knowing

  7. prophettt Avatar

    Ghassan,
    I hardly ever comment on economic and financial issues because I consider myself a student who is always willing to learn, instead of a person of knowledge on these topics. However, I have couple of humble questions which might reveal my nativity on this subject.
    Are you suggesting that increase of wages based on CPI is supposed to equalize the life style and the buying power of workers regardless of why(or If) one owns a house and the other does not ,or regardless of where people happens to live?
    The example you presented where Ali who owns a house will benefit from such wage increase, and Elias will benefit by not falling behind, would have indeed served the whole purpose of tying wage increase to CPI. Do we know if Ali and Elias earn the same salary or not? What difference would it make if they did not?
    I understand that CPI measurement in country like Lebanon may not be as accurate as it is in other countries, But why can’t they tie wage increase to cost of living ?
    Even in the united states, where cost of living varies between a big city and a small town in middle America, minimum wage is always the same. The average Willy who lives in Xville will always benefit more than average Tayron who lives in an Urban neighborhood because of the difference of cost of living.

    1. Prophettt
                    Let me start from your last point first. It is true that the Minimum Federal wage rate is the same all across the country but states , many of them, set their own rates that are way above the Federal minimum in order to account for these CPI differences. San Fransico has a minimum wage rate that is above $10.00 when the federal rate is only $7.35.
                   The CPI is composed of a basket that has over 2000 items in it. Let us assume that Housing is 50% of that basket, so when housing goes up in price by 40 % the CPI increases by 20%. But the person who has already purchased a home prior to the increase in the prices of homes will not be affected by the CPI and so any increase in wages that is ties to tyhat CPI is pure gravy to that individual.
                  As far as the Lebanese specifics are concerned I have not heard or seen or read about a serious study in Lebanon to compose a basket of goods and services that is adequately representative of the typical Lebanese consumer. The very few small studies that we have are usually rough estimates sponsored by the IMF or the UN and we never seem to update them.
                  Automatic increases in wages are dangerous since there are better and more effective ways of dealing with poverty. And please note that I think believe that wages should keep up with inflation but not by forced adjustment every year. An automatic annual adjustment is the best way to gaurantee higher unemployment among the poor and the unskilled.

  8.  Avatar

    Ghassan,
    I hardly ever comment on economic and financial issues because I consider myself a student who is always willing to learn, instead of a person of knowledge on these topics. However, I have couple of humble questions which might reveal my nativity on this subject.
    Are you suggesting that increase of wages based on CPI is supposed to equalize the life style and the buying power of workers regardless of why(or If) one owns a house and the other does not ,or regardless of where people happens to live?
    The example you presented where Ali who owns a house will benefit from such wage increase, and Elias will benefit by not falling behind, would have indeed served the whole purpose of tying wage increase to CPI. Do we know if Ali and Elias earn the same salary or not? What difference would it make if they did not?
    I understand that CPI measurement in country like Lebanon may not be as accurate as it is in other countries, But why can’t they tie wage increase to cost of living ?
    Even in the united states, where cost of living varies between a big city and a small town in middle America, minimum wage is always the same. The average Willy who lives in Xville will always benefit more than average Tayron who lives in an Urban neighborhood because of the difference of cost of living.

    1. Prophettt
                    Let me start from your last point first. It is true that the Minimum Federal wage rate is the same all across the country but states , many of them, set their own rates that are way above the Federal minimum in order to account for these CPI differences. San Fransico has a minimum wage rate that is above $10.00 when the federal rate is only $7.35.
                   The CPI is composed of a basket that has over 2000 items in it. Let us assume that Housing is 50% of that basket, so when housing goes up in price by 40 % the CPI increases by 20%. But the person who has already purchased a home prior to the increase in the prices of homes will not be affected by the CPI and so any increase in wages that is ties to tyhat CPI is pure gravy to that individual.
                  As far as the Lebanese specifics are concerned I have not heard or seen or read about a serious study in Lebanon to compose a basket of goods and services that is adequately representative of the typical Lebanese consumer. The very few small studies that we have are usually rough estimates sponsored by the IMF or the UN and we never seem to update them.
                  Automatic increases in wages are dangerous since there are better and more effective ways of dealing with poverty. And please note that I think believe that wages should keep up with inflation but not by forced adjustment every year. An automatic annual adjustment is the best way to gaurantee higher unemployment among the poor and the unskilled.

    2. Prophettt
                    Let me start from your last point first. It is true that the Minimum Federal wage rate is the same all across the country but states , many of them, set their own rates that are way above the Federal minimum in order to account for these CPI differences. San Fransico has a minimum wage rate that is above $10.00 when the federal rate is only $7.35.
                   The CPI is composed of a basket that has over 2000 items in it. Let us assume that Housing is 50% of that basket, so when housing goes up in price by 40 % the CPI increases by 20%. But the person who has already purchased a home prior to the increase in the prices of homes will not be affected by the CPI and so any increase in wages that is ties to tyhat CPI is pure gravy to that individual.
                  As far as the Lebanese specifics are concerned I have not heard or seen or read about a serious study in Lebanon to compose a basket of goods and services that is adequately representative of the typical Lebanese consumer. The very few small studies that we have are usually rough estimates sponsored by the IMF or the UN and we never seem to update them.
                  Automatic increases in wages are dangerous since there are better and more effective ways of dealing with poverty. And please note that I think believe that wages should keep up with inflation but not by forced adjustment every year. An automatic annual adjustment is the best way to gaurantee higher unemployment among the poor and the unskilled.

  9. Ghassan,  I like your taste nice looking girl, she must be an Aouni holding an orange sign. The CPI is the most distorted index out there. The government computes the CPI excluding food and energy well, these two items represents 90% of the average family expenses. Inflation is running close to 10% not the 1.5% to 2.5% the government reports, the reason they do this is to keep entitlement payouts low and it saves the treasury billions in interest paid on debt. If you graph the TIPS (Treasury inflation protected securities) you will find that these instruments went up close to 18% in the last 2 years. BTW TIPS are a great investment for people who want to protect their $$$$ from the Bernanke. Minimum wage is not a good indicator because the majority of people that get it are the 14 year old kids, most workers get 10-20% more than the minimum wage.  
    Great analysis I always learn something from you.

    1. 5thDrawer Avatar

      Yes, indexing is figured on the seemingly weirdest costs of daily life sometimes. And it’s not a good idea at all to index anything … once having done so makes it almost impossible to stop without a war. 🙂
      But there needs to be a minimum nationally, especially if you don’t want most people starving to death regularly – like in Somalia. It makes the bottom masses equal no matter where they are in the country – as they should be – and they might begin to feel comfortable about changing employers and travelling to ‘foreign’ parts of Lebanon knowing that they couldn’t get paid any less. (Imagine !)
      It could help create a ‘national identity’, at least. 😉

  10.  Avatar

    Ghassan,  I like your taste nice looking girl, she must be an Aouni holding an orange sign. The CPI is the most distorted index out there. The government computes the CPI excluding food and energy well, these two items represents 90% of the average family expenses. Inflation is running close to 10% not the 1.5% to 2.5% the government reports, the reason they do this is to keep entitlement payouts low and it saves the treasury billions in interest paid on debt. If you graph the TIPS (Treasury inflation protected securities) you will find that these instruments went up close to 18% in the last 2 years. BTW TIPS are a great investment for people who want to protect their $$$$ from the Bernanke. Minimum wage is not a good indicator because the majority of people that get it are the 14 year old kids, most workers get 10-20% more than the minimum wage.  
    Great analysis I always learn something from you.

    1.  Avatar

      Yes, indexing is figured on the seemingly weirdest costs of daily life sometimes. And it’s not a good idea at all to index anything … once having done so makes it almost impossible to stop without a war. 🙂
      But there needs to be a minimum nationally, especially if you don’t want most people starving to death regularly – like in Somalia. It makes the bottom masses equal no matter where they are in the country – as they should be – and they might begin to feel comfortable about changing employers and travelling to ‘foreign’ parts of Lebanon knowing that they couldn’t get paid any less. (Imagine !) 😉

  11.  Avatar

    Ghassan,  I like your taste nice looking girl, she must be an Aouni holding an orange sign. The CPI is the most distorted index out there. The government computes the CPI excluding food and energy well, these two items represents 90% of the average family expenses. Inflation is running close to 10% not the 1.5% to 2.5% the government reports, the reason they do this is to keep entitlement payouts low and it saves the treasury billions in interest paid on debt. If you graph the TIPS (Treasury inflation protected securities) you will find that these instruments went up close to 18% in the last 2 years. BTW TIPS are a great investment for people who want to protect their $$$$ from the Bernanke. Minimum wage is not a good indicator because the majority of people that get it are the 14 year old kids, most workers get 10-20% more than the minimum wage.  
    Great analysis I always learn something from you.

  12. Mr. Karam We have not heard from you lately , what is the real reason of Mr. Charbel Nahhas’s resignation , he is accusing some elements in Gov. that they were going to steal money if he had signed the way it was, what do you say, we in diaspora do not have all the details.

  13.  Avatar

    Mr. Karam We have not heard from you lately , what is the real reason of Mr. Charbel Nahhas’s resignation , he is accusing some elements in Gov. that they were going to steal money if he had signed the way it was, what do you say, we in diaspora do not have all the details.

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