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Friday, 7 October 2011

Sweat Equity, Profit Sharing and Minimum Wages (Guest Blog)

Higher wages do no good if every price one pays also goes up by the same amount. Wage increases at a rate above inflation is what workers really want, and flatter wages accompanied by a decrease in consumer inflation (or even deflation, though that is a long way away and not necessarily desirable) would accomplish essentially the same thing over the long term. Not to say on my own estimation that the minimum wage should or should not be raised, I think that that is something for careful consideration by duly elected people given access to all available facts on the matter and the advice of experts. Where I think that people may be confused is that more money in their pockets combined with higher prices for everything results in "more or less" in their cupboards. It depends on relative rates. I will try to construct a theoretically sustainable minimum wage formula:

The first question that needs answering is whether or not we accept the JCTR needs basket and household size of 6 as a reliable and reasonable measure of the cost of living? Note: If we don't take their word for it, then we face having to create a new measure and agency to administer it, since nobody else is clamoring for the chance to take over the task or producing competing results. That said I am going to assume a "Yes" answer to this and move forward accordingly. The next issue is how much of the family monthly needs basket we expect any given wage earner to bring home, and how many hours of labour per day/week/month we should expect that person to put in on the job in order to produce that wage? If we assume for the moment a nice round number like 50 hours per week and 4 weeks per month, and a single wage earner per household, the monthly needs basket can be divided by 200 hours to arrive at a subsistence hourly wage. The current needs basket stands at somewhat over 3 million kwacha per month, we will round for simplicity, meaning K750,000 per week, or K15,000 per hour, at least, and after PAYE. Then over time, as the means basket cost goes up or down, so would the wage.

Where things get more complicated is when these variables I have so conveniently fixed start to become ranges instead of single values, that means that with three floating variables we are describing a 3d object within which there are corners and crevices where unfairness can lurk and wait to be exploited by the unscrupulous. At the same time, such variability can also allow flexibility and direction, where efforts to level the playing field can be applied to the actual slopes involved rather than a two dimensional simplification that loses some nuance. So if we say that we expect 1 wage earners per household of between three and eight, each of whom works 20-70 hours per week, and a range of estimates of their monthly needs at between 2 and 4 million kwacha per month (which range in length from 28-31 days), determined by who is being asked where by whom at what time of year and with what preconceived agenda -- well just where within that distorted cube of possible positions do we want to be? If we get close to the surface will we find it smooth and even, or jagged with special carve-outs and exemptions, with market distortions from infrastructure imbalances, with capital market inequities? If we sit in the exact center are we allowing the people at the extremes to change us by changing the shape of the box at the edges?

My advice is to make the minimum wage truly subsistence, but base it on a reasonable standard of full time hours such that additional effort can translate into compensation above mere subsistence. Given unemployment in Zambia it is not unreasonable I think to assume a single full time job holder per household, or equivalent part time employment by multiple household members. This has the added advantage of allowing double-full employment or cottage industry households to accumulate significant savings over time and potentially lift themselves out of poverty thereby. While an arbitrary number of hours per month may be lower than some jobs require from workers in order to maintain production, and therefore perhaps generous, it is not unreasonable to assign some number to use when considering the reasonable minimum that workers should be paid per hour in order to provide the basic minimum standard of living. The number of workers in the household and the number of cumulative hours they must work in order to meet the needs basket for the designated household size should be divided into the cost of that basket to arrive at a numerical hourly standard for compensation. The tradeoff should be that a living hourly wage means that voluntary overtime hours should not be overly compensated, which will keep costs low in high employment industries with long shifts, as well as prevent employees from having to seek additional employment often at lower wages in order to supplement their incomes. As the general level of employment and skill increases throughout the economy, employers will find it necessary to exceed these minimums as a matter of course in attracting employees. Over the short term however, drastic increases in the minimum wage can send businesses into a panic over their bottom line.

Some businesses simply cannot take in enough at the till to meet higher minimum wages, and suddenly passing the costs on to customers may drive them away. For a marginal business even one day of lost sales can mean there is not enough money to pay for everything that month. That is where waivers should be given to businesses that are willing to adopt open accounting standards and agree on profit sharing (or loss sharing) between owners and workers. That means that the hourly wage would be modified by the profitability of the business, so that when there is a high volume of profitable business, the workers get some of the owner's share, but when times are tough for the business, the workers wages are lower so that the owner doesn't have to take the full brunt of bad times. Such a standard can even be applied across an entire industry where licensing is already robust and profit sharing mechanisms common. An example of this would be hospitality industry workers who split a share of gratuities from customers, the amount of which is directly determined by the gross sales of the business, in exchange for a reduced standard hourly wage below the statutory minimum. Another option for certain types of businesses is so-called "Sweat Equity", which implies the contribution of labour without immediate compensation in return for an ownership share in the product at time of sale. This model is most often employed in construction or agricultural circumstances where available capital has already been invested in material inputs, and where employees have a reasonable expectation that there will be a market for the product and fair distribution of the proceeds. Where such arrangements with labour are agreeable and fair, employers should be allowed to exchange equity for effort in lieu of minimum wage compliance.

All in all not a simple issue, and there are many reasons to make a flexible, but therefore not exactly level, playing field. Where the nature of the industry allows for fair substitution of profit sharing and/or sweat equity replacements for minimum wages, then such arrangements should be allowed. Total average compensation to employers and employees can then be reviewed from time to time by all parties and adjusted where reasonable. Minimum wages should not stop willing workers from engaging in potentially profitable enterprises where they can invest effort rather than capital and reap similar rewards amid the same risks as their employers. It will be a bit more complex to implement up front, and mistakes will be made, regulations will be skirted, and loopholes inevitably exploited. The hope is that with flexibility and transparency it will be clear to everyone, employer, employee, casual observer and magistrate alike, whether or not compensation is fair, be it by wage, or sales commission, or equity stake, or combination of the three. It would be ideal if a formula can be presented which can act as a straightforward guide to negotiating employment compensation in order to ensure either a minimum standard of living, or an equivalent piece of a minimum standard labour share of profits and/or equity commensurate to the risk taken in relation to the employer(s). To further the ideal these would be mutually interchangeable by percentages to allow labour to negotiate for a reduced hourly wage combined with limited profit sharing and/or conditional sweat equity.


The above post was written by our resident contributor - L Yakima.

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