Minimum wage 2023: employment in Colombia will be on the ropes after rise

There was an agreement between the Colombian Government, labor unions and businessmen on the increase in the minimum wage for next year, and although a priori it does not seem to have a negative effect on price formation, there are many doubts about what will happen to employment.

With the increase in the minimum wage and the increase in the transportation subsidy, employees in Colombia will receive $1.3 million over the next year.

One of the explanations that financial analysts have for the high inflation observed this year is the exaggerated rise in the minimum wage between 2021 and 2022, when despite inflation of 5%, wages increased by 10%.

Andrés Langebaek, director of Economic Studies at Grupo Bolívar, assures that “we had an estimate of 15.5% to 15.7%, that is, it is above what was projected, but not excessively. If you do the math, you see that low-income inflation was taken, which is 14% plus productivity and a little more, in the midst of all the speculation, it’s not such a terrible increase.”

However, despite not being a disproportionate and populist increase, Langebaek does find worrying issues for 2023. “It is very clear that the most important impact will be on employment, the studies of Luis Eduardo Arango from Banco de la República, show that there is a temporary effect on inflation, but to the extent that next year we have important disinflation effects such as lower growth in the economy, the fall in commodities and the reduction in international inflation, this will attenuate the effects of the rise, but instead in unemployment the situation is more delicate”.

The Grupo Bolívar economist maintains that the concerns are in everything related to employment, the generation of new jobs, and the destruction of current jobs.

“For every real point in the increase in the minimum there is an effect on employment of 1%, where 60% is job destruction and 40% is to stop creating new jobs, so both are worrying,” Langebaek concluded.

Meanwhile, Daniel Escobar, Strategy Director of FiduOccidente, assures that “it is an increase above the technical adjustment, and therefore it will have an impact on the generation of employment in 2023, the good thing is that it was not an increase of 20% as it was speculated, but it will undoubtedly affect employment in a year in which we will have a sharp slowdown.”

Currently the unemployment rate is 9.7%, and inflation for the last 12 months stands at 12.5%. In the most recent Dane employment measurement, the unemployment data was once again below 10% after several months in double digits.

Finally, Sergio Olarte, chief economist at Scotiabank, says that “the direct part of inflation is not going to be a problem due to the deindexation of some 200 products. The direct part that automatically raises prices on January 1 is not worrying. What does worry is the increase in production costs, there are many companies with intensive labor”.

“For example, a restaurant, there are a lot of people indexed to the minimum wage and that causes production costs to be transferred to final prices, and if that cannot be done, it will create more unemployment, we don’t know how much of a slowdown it will be and how much price will increase. I would dare to say that the minimum wage can affect inflation by less than one percentage point due to the deindexation”, concluded Olarte.

With information from Bloomberg Línea