Low Productivity: the Elephant in the Room in Colombia’s Minimum Wage Debate
Negotiations on the minimum wage in Colombia are fast approaching. On the one hand, unions will demand an increase above inflation to safeguard their purchasing power, which has been badly hit by the recent tax reform. On the other side, entrepreneurs will be arguing that the remuneration for work must be aligned with labor productivity.
The discussion, surely, will discuss arguments to protect workers, while ignoring structural realities when it comes to productivity in a global economy. The results of the Private Competitiveness Council are astounding; it takes around four Colombian workers to produce what one does in the United States.
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There are two main reasons that can help to shed light on the reasons for our lack of productivity: 1) poor investment in innovation and training for work and 2) a high rate of informality.
Ricardo Hausmann, in an article published by Projec Syndicate, suggests that copying models such as Silicon Valley, without having gone through the previous steps for a similar ecosystem to occur, is innocuous, and gives suggestions to promote innovation in countries going through the process of development. This economist reminds us that most of the investments in research and development in the developed world were driven by large companies, such as AT & T, which had a monopoly position in the market. This company invested large sums of money in laboratories and think tanks and developed technologies such as fax, lasers, radars, and satellite communications, among others.
Unfortunately, Colombian monopolies invest little in innovation and talent training. Most of their efforts are aimed at protecting their businesses from global competition and sustaining deficient production structures, which generate a higher cost to users for poor quality service. It’s time to change the way we look at the cartels that dominate our economy; either we pass true antitrust laws or we look for ways to get more involved in improving labor competitiveness and innovate.
For this, we need to develop a synergy between the corporation, the academy, and the state. The education system must be more relevant to real work experience, and workers must be taught about new technologies. The business sector must clearly define its needs when it comes to human resources, and the state must curtail its protectionism, which seeks to stifle competition through trade restrictions and tax benefits which aid Colombian corporations at the expense of the Colombian consumer.
Additionally, Colombia has the second highest rate of labor informality in the region, surpassed only by Peru. This is due to a combination of several factors: very high taxes, a lackluster education system, and a high minimum wage compared to the average salary. The minimum wage exceeds the average salary in only six of Colombia’s 32 states.
Informality is the main explanation of low productivity; it generates disincentives for the accumulation of human capital. One in three workers in the formal sector requires high levels of complex cognitive skills, while only one in six in the informal sector requires them. To reverse the trend, it is necessary to find ways for these workers to access training programs for work. Policies such as trade schools and government training programs such as “Ser Pilo Paga” (a Colombian program translated “It Pays to be Smart”) can be effective in breaking the vicious circle, as they give children of informal workers access to quality education.
We do ourselves a disservice by adhering to the same old arguments. If the problem of low labor productivity is not addressed, we will continue with high rates of informality in the labor market, and will be ill-equipped to compete in the global economy.