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Experts say salary hike to $500 will be a tough offer to keep

Published on June 01, 2021

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The plan of the government of Guillermo Lasso to increase wages gradually, during the four years of administration, is not yet known.

Unemployment is one of the problems that the new government will have to take on. Along with that problem, one of the new President’s campaign proposals was to increase the basic unified salary to $500, within four years.

This increase in the unified basic salary was one of the most important campaign promises of the Government of Guillermo Lasso. However, it is not yet clear what the path for such an increase will be, which in current economic conditions, according to experts, could affect the labor-intensive sectors and small and micro-enterprises, especially if it is not done technically.

At the moment it is only known that the increase plan will be revealed by the president himself, according to the Minister of Labor, Patricio Donoso.

Jaime Carrera, Executive Secretary of the Fiscal Policy Observatory (OPF), said it will be difficult to fulfill this campaign offer, because in the midst of the pandemic, with high levels of underemployment and with the decline in full employment, the measure may negatively affect small and micro enterprises, which currently cannot pay even the minimum. The measure, he says, sounds contradictory with the discourse that has been given in support of micro and small businesses. Raising the salary to $425 by 2022, for example, would be counterproductive and affect competitiveness, he adds.

In fact, according to the latest data from the National Institute of Statistics and Censuses (INEC), which are now provided on a monthly basis, the employability indicators are not pointing to a recovery and the average salary in Ecuador, rather than recovering, has fallen. In January 2021, the average salary in Ecuador was $ 434.70, but by April it had dropped to $320.80.

Additionally, suitable employment (work of at least 40 hours a week and with remuneration equivalent to at least the unified basic salary) fell from 34% in March to 32.6% in April of this year. Meanwhile, unemployment in April stood at 5.6%, slightly higher than that registered in March, which was 5.5%.

In the same period, underemployment (less than 40 hours of work and lower salary) grew from 22.7% to 23.3%, while non-full employment (work of less than 40 hours and lower remuneration when a person is not looking for more hours of work) went from 25.6% to 25.2%. On the other hand, unpaid employment (work without receiving remuneration) had almost no variation, going from 11.3% to 11.6%.

Alberto Acosta Burneo, Editor of Weekly Analysis, says that for the salary increase to be viable, it is necessary to recognize that it depends on the productivity of work—so the challenge that must be met gradually is to increase productivity.

Burneo says this can be done through the reduction of tariffs on inputs, capital goods, purging excess regulations and eliminating unnecessary procedures in order to reduce obstacles to production. He says that the work proposed by the new Minister of Production, Julio José Prado, in the sense of creating productivity tables is positive.

“It is a political offer that must be met, but the important thing is that it is related to competitiveness, so that jobs are not destroyed,” he says. For Acosta Burneo, productivity is different according to the sectors. There are certain sectors that are labor intensive and others that use more machinery. The biggest problem will be for the labor-intensive sectors. For this reason, Acosta foresees that this increase will be made in a differentiated way, depending on the evolution of productivity and that some sectors reach the value of $500 much earlier than others.

Pablo Zambrano, President of the Chamber of Industries and Productivity, explains that the business sector has always maintained that any revision or increase in wages must be based on productivity. He says that if it is not done in a technical way, it could generate distortions in the economy.

Meanwhile, Gabriela Sommerfield, Vice President of the Quito Chamber of Commerce, believes that the increase should be gradual. For this, the productive system must be strengthened, supporting companies in economic reactivation with long-term financing, with financial costs that have lower interest rates. The increase, says Sommerfield, must be tied to variables such as economic recovery, the advancement of vaccination, the level of income from loans, among others.

Basic salary grew 7 times in 20 years of dollarization; purchasing power improved

Ecuador’s basic salary has grown 700% in the two decades of dollarization, going from $57 in 2000, to $400, which is still the basic salary of 2021 (though this may still increase).

In the first years of dollarization a kind of adjustment of the system was generated. The salary went from $57 in 2000, to $160 in 2006; almost triple the increase.

This is because previously, between 1990 and 1999, the salary had been affected by the progressive devaluations of the sucre, which caused the salary in dollars to be reduced as the currency was devalued, says an analysis by the Ministry of Labor. The document also says that between 1998, and the beginning of 2000, there were no salary increases due to the fiscal situation.

In contrast, from 2007 to 2017, the rise was well above inflation, which made the country less competitive. The salary went from $170 to $375, a little over 200%.

Since then, the salary has grown, but in a less accelerated way ($14 dollars in four years), going from $386 in 2018 to $400 in 2021.

According to Carrera, between 2000 and 2006 the living wage did increase, but as a response to inflation, which in 2000 was 96%. In 2001, inflation already fell to 37%; in 2003 it was still high at 12%. Only as of 2004 has the country reached equilibrium in dollarization with inflation of 2.7%.

On the other hand, between 2007 and 2017, the salary increase was totally disproportionate in relation to inflation, which remained between 2% and 3%, says Carrera.

This behavior means, according to Carrera, that there was an improvement in people’s purchasing power; but at the same time, the consequence was that the country became expensive, since production costs also became more expensive.

According to data from the National Institute of Statistics and Censuses (INEC), the relationship between salary, family income and the basic food basket has improved.

For example, in January 2000, the family income (calculated by considering 1.6 income earners in a family) was $80, but the basket cost $178. Thus, the shortfall was 63% between income and the basket. At the end of the Lucio Gutiérrez government, the difference was 32%.

In the Correista decade, family income increased almost to the level of the basket. Finally, in October 2020, which is the latest data available from the INEC, the family income, which is calculated at $746, exceeds the value of the family basket, which is $710, that is, the income exceeds it by 5.06%.

As of April, the average salary gap between men and women is $51

President Lasso has also spoken of the need to equalize the salaries of men and women. On the subject, the INEC indicators reveal inequity in the labor issue in relation to gender.

In April 2021, the global employment rate stood at 95.3% for men and 93.2% for women. The difference is much deeper when looking at the adequate or full employment rate in April, which was 37.2% for men and just 26.5% for women. As of April 2021, the median earned income for a man with a job was $340.20, while that for a woman with a job was $289.20. A difference of $51.00 on average.

Sommerfield says that the salary cannot be set based on gender but measured in relation to the capacity and responsibility of the position. Serious companies are not looking at whether the employee is male or female, but talents and experience.

In any case, he said that this is “a nice opportunity to work with the unions, support large, small, medium and micro to be able to educate and train them on salary allocation, to raise awareness on this issue.”

Zambrano believes that equal wages must be applied without excuses. Remember that the laws and the Constitution already guarantee non-discrimination and absolute equality between human beings. “The salary must be the same for any person in relation to the function they are occupying.”

One way to guarantee that there are no differences, says Bureno, is by eliminating that perception that it is more expensive to hire women, leveling the benefits. For example, on the issue of maternity leave, now paternity leave is also given, then an equity is established.

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