Economic and Social Considerations Surrounding the Issue of the Legal Minimum Wage in Colombia.
According to official and private sources in Colombia, of the 24 million workers, 42% (10 million) earn less than one minimum wage, while 15% (3.3 million) earn exactly one minimum wage.
In addition, 22% (5.3 million) earn more than one minimum wage, 8% (2 million) receive more than two minimum wages, and only 4% (930.000 people) have incomes higher than four minimum wages, making the inequality in wage income levels in the country visible.
The above highlights the informality of work, those 10 million workers with non formal activities and with incomes below the legal minimum, such as street vendors and micro entrepreneurs who do not contribute to pensions and health are outside or belong to the subsidized regime. Of these, those who own businesses such as convenience stores and neighborhood shops are not registered with the Chambers of Commerce or the DIAN and handle almost everything in cash. Street vendors occupy public spaces for their work and thus do not have to pay rent or services, they work on their own and involve their families, they are in mass transportation stations and in areas of public affluence such as parks, stadiums and shopping centers of all social strata.
This situation of informality is correlated with a high unemployment rate in the country compared to other Latin American countries and informality is even higher in cities other than the main department capitals and in rural areas of the country.
But when looking at the minimum wage workers, which are 3.3 million, it is a figure that is comparatively one third of the informal workers mentioned above, which is why the country is in arrears in jointly designing policies with the private sector to formalize informal work through periodically revised goals for the absorption of labor by the largest private companies (mainly) belonging to the sectors of agriculture, industry, infrastructure, health, communications and technology, construction, real estate services and the financial sector. At the end of the annual period, the goals should be evaluated for compliance (this topic will be discussed later) and it should be taken into account that to begin with, the absorption should be through the hiring of informal workers with the minimum wage level (which would already be a gain for them in income) and thus they obtain pension and health coverage from the contributory regime, later those with higher salaries who probably have a higher level of education can be hired.
Without solving the problem of informal work, the measures of the increases in the minimum wage that refer to the minimum wage of formal work must be cautious in terms of negatively impacting those informal workers, since the difference in income between them increases if exaggerated increases are placed in the legal minimum wage above the inflation caused and the expected. Probably the informal workers will also increase their income through increases in the prices of what they sell or of the business because they will also obtain it more expensively from their suppliers, but these are increases probably less than or equal to inflation 1/ because above all they want to keep their regular clients in the habit of credit but of course they continue without social security or only with the Sisben.
An estimate of how much it costs the country to have workers with a minimum wage of 1.300.000 pesos (which is the salary before the recent increase decreed) is 3.3 million workers at 1.300.000 pesos each, that is 4.290 billion pesos a month that are paid by the private sector and by the public sector to their workers in that condition.
As mentioned at the beginning of this note, only 930.000 workers (4% of the total) have salaries higher than 4 minimum wages (5.200.000 pesos) and within these are the workers who belong to the seats in Congress in the Senate and House of Representatives.
The total salary of a congressman in Colombia is 48.142.000 pesos, which is divided into three items to arrive at that total amount: basic allowance of 11.640.415, representation expenses of 20.694.078 and special service bonus of 15.807.981. Since there are 294 senators and representatives, that represents 4 billion pesos a month for the country, specifically for the General Budget of the Nation.
When comparing the value of minimum wage workers with the value of congressmen, some observations revolve around the impact on food consumption and savings or investment. Minimum wage workers mainly demand food, although they also demand other household items and pay rent and utilities, but what they set aside for savings is very little or nothing; they generally do not save but instead turn to credit. This implies that an increase in the minimum wage does impact on the price of food and other items via consumption and business costs, especially if that increase is above the inflation caused and expected. This impact slows down a decline in inflation that is underway and probably the inflation targets will be delayed for that reason by several more months than projected before that increase or a smaller increase of one point more than the inflation caused.
High salaries like those of congressmen, in contrast, do not affect the price of food too much (they do so with other items such as technology, automobiles, and gasoline and private education payments) but are directed towards savings and investment and will have effects on the price of these investment assets once the increase is decreed, which, unlike the minimum wage, which is from january for congressmen, is in may with retroactive effects.
The think tanks and analysts are right when they affirm that the decreed increase in the minimum wage is another factor that, together with the devaluation of the peso, will slow down the reduction of inflation towards the goal, mainly via food and services, and that it is possibly not until december of this year but rather march or june of 2.026 that inflation will reach the goal of 3%.
What does make Colombia look like one of the most unequal countries in the world in terms of income is that 10 million workers have incomes below the minimum wage and belong to the informal sector. Obviously, their food consumption, along with rent and services, accounts for all their income, a situation that is not very different from that of minimum wage workers except that the latter have social benefits and transportation assistance.
Unlike the workers just mentioned, high-income workers (such as the Congressmen) are allowed to own assets with the addition of capital income from compound interest, the stock market, land, dollars or investment funds that multiply the value of their wealth inside and outside the country.
But to combat income inequality, the imposition of taxes that allow the distribution of resources for the poorest in education, health and housing must be accompanied by a greater commitment from the private sector, from large companies, to generate new formal jobs and thus reduce informal work.
In Colombia, income inequality is not corrected when comparing the situations before and after taxes, but remains the same, which shows that the tax system is not enough to reduce this inequality. However, it is politically complex to accept property taxes, but the country must change the direction of taxes from taxes on companies that must be replaced in part by taxes on individuals on income and property, the latter taxing at high levels through scales higher than the current ones so that the net result is to obtain more revenue for the country that allow for greater social investments towards the less favored population and thus achieve a reduction in high income inequality. Inequality measured by the Gini coefficient that reaches 0.54 2/ as mentioned before, one of the highest in the world and that must be included within the indicators subject to achieving goals as is done with the inflation goal; they would be goals for reducing inequality contemplated with the force of law as the purpose of all governments in power.3/
The same happens with unemployment, since in Colombia the rate is high, around 10% unemployment for a long period of time and is higher than the average in Latin America; without establishing a goal for reducing unemployment that is regulated by law, since it is difficult for a country like Colombia to reduce unemployment to levels of 7% or 6% only with variables such as greater economic growth (GDP), which is cyclical; while just as inflation was controlled by law through goals 4/, unemployment also requires a similar treatment, a condition that is required for greater formal hiring to reduce low income informal work, which has been mentioned in this note, to which millions of Colombians belong, and thus also correct the high levels of income inequality, as mentioned before. 5/
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1/ A good part of informal workers does not know about inflation, but they are going to raise the price of their products offered because of the suppliers and because they do know that rents and services are going to go up, probably food too and for others the Transmilenio has gone up in the case of Bogotá.
2/ According to official sources, when measuring inequality including, in addition to income, other assets such as stock values and investment funds, it rises to 0.75 in the Gini coefficient, worsening with respect to the result of that meter in the distribution of income and in terms of land ownership, inequality reaches 0.9 in the mentioned coefficient, registering the worst distribution.
3/ The Development Plans that are the law of the Republic and are drawn up at the beginning of each government are a route of investments and public policies directed at the economic and social development of the country, but they must be complemented by another law that specifically specifies the specific goals at the end of the presidential term and at the end of each year within those mandates on the issues of the unemployment rate, income inequality with the Gini coefficient and the reduction of monetary poverty.
4/ Inflation during the seventies, eighties and part of the nineties of the last century reached levels of around 25% annually and was able to be reduced to one digit since the beginning of this century because the central bank exercised the appropriate monetary policy functions contemplated in the law for this objective. Another economic objective established by law is the fiscal rule that directs prudent management of public finances. It is also a purpose disseminated among government analysts and think tanks to seek a limited level in the fiscal deficit and the current account deficit compared to the GDP.
5/ Also mentioned above was the reduction in monetary poverty, which is high compared to other Latin American countries and stands at levels of 33% of the total population and can also be included within the specific norms and goals in a law.
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