Salary compensation: Economic impact

The year 2016 is coming to an end. Earlier this week, it was time for the government to calculate the amount of salary compensation to be paid as from January 2017. After consultations with trade unions and employers, the government has decided to pay Rs 200 to those earning a salary up to Rs 15,000. Those earning more than Rs 15,000 up to Rs 50,000 will get Rs 125. There is no compensation for higher earners. 

The economy will see an injection of nearly Rs 2 billion next year, in the form of salary compensation. About 325,000 workers will earn an additional Rs 200 while 175,000 will see an increase of Rs 125 in their pay. It is however unlikely that this injection will cause an inflationist impact on consumption. 

Salary compensation is part and parcel of our socioeconomic tradition. The objective is to restore loss of purchasing power due to general rise in prices. In arriving at the quantum of compensation, a tripartite committee comprising of government representatives, employers and trade unions analyse the inflation and productivity rate in order to calculate the amount payable. But, in practice, do workers really catch up with the loss of purchasing power? According to economist Prithviraj Fowdar, this is not always likely, as a spiral effect may even work backwards. “Salary compensation is a cost to the employer and logically he will pass on the cost to the consumer in the form of a price hike.

People who are self-employed and who receive no compensation have a tendency to also increase their prices, to compensate themselves and also because they ‘believe’ consumers have got more money to spend. At the end, consumers are no better off, so there is no real compensation.” Gavin Ng, Analyst, explains that the average consumer sees his purchasing power increase by Rs 200 or Rs 125. “The consumer has limited margin. With this small increase, he cannot contemplate big expenditure. The extra money will thus find its way on food, cigarettes, phone cards or gaming. The amount does not allow durable investment. However, while the amount seems insignificant for one worker, it is a burden for an employer as the wage bill increases. This is a severe financial constraint on small enterprises. If there is not a corresponding increase in turnover or productivity, then enterprises are the losers.”

It is very rarely that trade unions are satisfied with the amount of compensation proposed. Meetings often degenerate, as was the case last year. This year, many union bosses termed the amount as ‘an insult to workers’. The first tripartite meeting was chaired by the Minister of Labour, Soodesh Callichurn, last week. Trade Unions had proposed a salary compensation varying between Rs 400 and 600. On Monday the meeting was presided by Finance Minister Pravind Jugnauth. After deliberations, the figures of 

Rs 200 and Rs 125 were announced.  The minister argued that the current economic context does not allow a higher compensation. It must be recalled that last year a salary compensation of Rs 150 across the board was announced. The year before, in 2015, the amount paid was Rs 600. But the inflation rate was also higher in 2014 and 2015 than in 2016 (see table). 

It is estimated that the salary compensation for 2017 will cost the economy Rs 1.9 billion. The private sector will have to fork out Rs 985 million while the government will see a bill of Rs 880 million. 

Zohra Gunglee: « Time to innovate »

Economist Zohra Gunglee says that both the concept of salary compensation and the method of calculating it are outdated. “As I said last year, this is a tradition in Mauritius and it does not evolve. We must think about new means to compensate workers of loss of purchasing power. While the amount per head seems insignificant, the total bill costs billions. Rs 200 or Rs 125 does not really make a big impact on the average worker, but just imagine, if the total amount of Rs 2 billion was invested in a collective good such as public transport, hospitals, schools or others, then everyone would have benefited more. For example, instead of being paid Rs 125 per month, I would prefer the money be spent to improve public transport so that I can go to work and back home without losing two to three hours in travelling due to road congestion. Another example: Investing billions in renewable energy might help reduce monthly electricity bill, and the worker is better off. There are so many examples,” explains Zohra.