A parliamentary hearing this week once again brought the establishment of a minimum wage in Ethiopia to the fore. Ever since Ethiopia made the transition from a command economy to a market economy in the early 1990s labour unions have consistently demanded for a minimum wage to be fixed by law. While the salaries of public sector workers, excluding employees of state-owned enterprises, has always been determined by the government, a national minimum wage policy has never been contemplated for workers governed by the labour law until recently. The majority of these workers earn wages that they simply cannot live on. Numerous surveys conducted by organizations such as the national statistics service and the International Labour Organization consistently reveal that approximately fifty percent of the workforce in Ethiopia lives in poverty. The inexorable rise in inflation, driven by various factors including political instability, internal displacement, drought, and increases in global food prices, has severely hindered these individuals’ ability to sustain themselves and maintain a reasonable standard of living.
The persistent advocacy of organized labor in Ethiopia, along with the International Labour Organization (ILO), for the legal establishment of a minimum wage was finally been acknowledged by the labor law that was newly enacted in 2019. This legislation formalized the concept and mandated the creation of a Minimum Wage Board, which includes representatives from the government, employers, trade unions, and civil society. This board is responsible for determining and periodically updating the minimum wage, taking into account factors such as the nation’s economic growth, labor market dynamics, and other pertinent considerations. Several initiatives have been undertaken to advance this objective, with the development of a roadmap for a sustainable minimum wage system in Ethiopia being a key component. However, despite the preparation and submission of draft regulations outlining the Minimum Wage Board’s powers and responsibilities to the Council of Ministers, progress thus far has been limited.
As Ethiopia seeks to balance economic development, worker protection, and the realities of its labor market the introduction of a minimum wage can have both advantages and disadvantages, which are critical to consider in the context of the country’s unique economic landscape. One of the primary benefits of establishing a minimum wage is the improvement in the standard of living for low-income workers. A minimum wage helps to alleviate the effects of poverty and reduce income inequality by ensuring that all workers receive a baseline level of income that enables them to meet their basic needs. In addition, when workers have higher disposable incomes due to a minimum wage, they tend to spend more on goods and services, which in turn can stimulate economic growth as it boosts the income of local businesses. Establishing a minimum wage also fosters fair competition among businesses given it compels companies that might have otherwise paid low wages to attract workers to improve job conditions or offer better benefits to attract and retain talent. Moreover, a minimum wage is likely to protect vulnerable workers from exploitation and unfair labor practices through the adoption of legal standards that prevent employers from underpaying employees, thereby safeguarding workers’ rights and promoting dignity in labour.
One of the primary concerns regarding minimum wage laws is that they may lead to job losses, particularly in small businesses and low-skilled sectors. Employers may struggle to afford higher wages, leading to downsizing, layoffs, or even business closures. In an economy like Ethiopia, where unemployment is a significant issue, the potential for job loss could negatively impact many workers. On the other hand, Ethiopia has a large informal labor market, and a higher minimum wage may push some employers to avoid compliance, forcing workers into unregulated, informal employment. This would undermine the intended protections of minimum wage laws and could lead to instability in workers’ earnings and job security. Setting a minimum wage has the potential to exacerbate inflationary pressure if businesses pass on increased labor costs to consumers through higher prices. This can diminish the purchasing power of workers, negating some of the benefits of the minimum wage. Furthermore, a uniform minimum wage may give rise to inequities because it does not adequately account for disparities between urban and rural areas, and between different regions. For instance, a minimum wage deemed acceptable in urban areas may be unsustainable for businesses in rural settings, which operate in different economic conditions.
Establishing a minimum wage in Ethiopia remains an elusive target in spite of the government’s recent overture to that effect. Needless to say, it is complex exercise that requires a comprehensive and balanced approach. Even as it enhances worker welfare, stimulate economic growth, and reduce exploitation, it also poses risks, including job losses, informal sector growth, and increased inflation levels. To maximize the benefits and mitigate the drawbacks, policymakers must carefully consider the economic context, conduct comprehensive impact assessments, and engage stakeholders in the decision-making process. Balancing the needs of workers with the realities of the economy will be essential in establishing a minimum wage that fosters both fairness and growth.
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