Loosening Guatemala’s Minimum Wage to Enable Formal Employment

The Guatemalan government, through its Ministry of Economy, is promoting three new scholarships to boost formal employment in the country — one for women and two for young people. The scholarships, introduced by the President Otto Pérez, have the stated goal of allowing new employees to learn the how-tos of a company while being paid in part by the employer and in part by the state for a maximum of two years.

Most importantly, these scholarships allow greater flexibility in the labor market. President Pérez, in order to make the programs work as intended, has also presented to the Congress a group of laws to introduce part-time formal jobs that do not require the monthly minimum wage payment. With these new laws, especially the Labor Inclusion Law, employers pay a fraction of the minimum wage, proportional to the hours worked — although they still must fulfill the rest of legal labor requirements (bonuses in December and July, paid vacations, social security, a recreation allowance, and others). Currently, Guatemalan companies cannot legally pay per hour.

Mario Archila, a law professor at Universidad de San Carlos de Guatemala, explains that a “minimum wage, without flexibility for paying it per hour, prevents hiring when flexible jobs are required. There are people available to work for four hours, but employers are not willing to hire them under a monthly minimum wage if they are just working half of the legal eight-hour day.”

The legal wage policy has divided Guatemala along legal versus black or gray market lines. There is the Guatemala with social security and labor rights (including the minimum wage), and there is the Guatemala with no contracts, almost no income, and limited capacity to rise out of poverty and into the formal markets.

The first group is only 25.5 percent of over 6.6 million Guatemalans who have found a job (out of a 15 million population). The rest work under the informal shadow and have become the majority of the resident population.

While most of the formal companies in the country are located in the metropolitan area of the capital, Guatemala City, the rest of the country’s labor force includes another 4.8 million Guatemalans. They tend to work under unaccounted for and poor conditions.

The 2012 National Employment and Income Survey and the 2011 National Life Condition Survey point out that about 80 percent of 6.6 million working Guatemalans have a monthly income of between US$35 to US$291. Of the national population of approximately, 40 percent live under the poverty line of US$3.17 per day. Fourteen percent live under the extreme poverty line of US$1.25 daily.

These conditions can, of course, change simply through employment, better salaries, and a chance to be more productive. However, the payment for a person’s contribution to a productive process in a company, or a salary, defined by Cristian Álvarez from the Centro de Análisis de las Decisiones Públicas, cannot be increased artificially.

“A minimum wage is not a measure set to help the poor, but in a broader sense is the legal prohibition for any human being to work for less than a standardized amount,” Álvarez says. “This causes the employer to just stop employing people at all, which means firing, or to stop employing them formally.”

Formalization alone, however, is not a panacea for the labor market or a solution to poverty. Formalization, at least in Guatemala, means that companies are forced to pay taxes over incomes and transactions and high amounts of overhead costs to sustain employee bonuses, vacations, and social security. In this way, the minimum wage is just another obligation of formal jobs, but unlike the other requirements, this one goes through the maneuvering of union leaders, crony capitalists, and state officials every year.

The key upside of formalization in jobs, though, is that they encourage and enable employers and employees to make and fulfill legal labor contracts. These give certainty of income to the employee and offer valuable input to the company’s accounting.

According to Juan Carlos Paiz, Presidential Commissioner for Competitiveness and Investment of the Central-American country, the reasons for mass informality in Guatemalan companies are the lack of security on the streets, the high energy costs, and the poor infrastructure across the country — but the main obstacle for entrepreneurs is the minimum wage.

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