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Chiles minimum wage increase and its impact on the tourism industry.

In a move to address income inequality, President Gabriel Boric of Chile announced an agreement with the Worker’s United Centre of Chile (“CUT”) to raise the minimum wage from CLP 350,00 to CLP 400,000 started in January 2023 and CLP 500,000 in July 2024. While the measure has received initial approval, its final validation is pending and opposition parties, particularly from the right-wing, express concerns. Among the sectors affected, the tourism industry fears the potential impact on the viability of businesses, leading to calls for financial compensation. 

Opposition parties and certain sectors, such as tourism, argue that the proposed minimum wage increase could jeopardise the survival of hotels and restaurants, among others. Hoteleros de Chile, the local association of hotel-sector businessmen, conducted an internal survey revealing that 82% of its members anticipate adverse effects on their operations due to the high wage hike. To address these concerns, Alberto Pirola, president of Hoteleros de Chile, has urged the government to provide a new and more substantial financial compensation package for the hotel industry.  

Recognising the challenges faced by the tourism industry, President Boric appointed a new deputy secretary for tourism in March 2023. This appointment aims to design new tourism strategy focusing on sustainable development and growth. The government is also actively collaborating with sector stakeholders in the preparation of the 2035 Decentralised National Tourism Strategy. The involvement of the United Nations Development Programme (“UNDP”) in this process brings valuable expertise and global insights to the table.  

These initiatives highlight the government’s commitment to addressing significant challenges, however according to a Chilean parliamentary advisor, “It is unlikely that the minimum wage will be approved in the exact terms proposed by the government, considering that the bill contemplates a series of deadlines, mechanisms and adjustments that remain subject to discussion.” The advisor continues, “While there is a high probability that the full proposed amount of CLP 500,000 per month will be approved, which the proposal establishes as of July 2024, the entry into force could be postponed as other aspects of the bill do not generate consensus.” 

“It is unlikely that the minimum wage will be approved in the exact terms proposed by the government, considering that the bill contemplates a series of deadlines, mechanisms and adjustments that remain subject to discussion.”

A parliamentary advisor, Chile

While it is essential to tackle income inequality and improve the livelihoods of workers, it is equally important to ensure the viability of businesses, particularly in the tourism sector. The concerns raised by the hotel industry highlight the potential risks associated with abrupt minimum wage increases. The parliamentary advisor points out, “For many of these hotels slight increases in their costs mean huge implications to their already fragile finances. There is no doubt that the hotel sector will be affected both by the minimum wage as well as by the pending rules on 40-hour working hours and changes in social security contributions. In the case of the increase in the percentage of social security contributions, it is proposed that this will be borne by the employer, at 6%, which implies an increase of 6% in the cost of each employee.” These combined costs are expected to have to a significant impact on employment levels. 

According to a Chilean bank director the proposed measures are pushing employers to seek less costly alternatives, including automation and less expensive migrant labour. “Many workers find it difficult to find employment in the formal sector and begin to develop activities in the informal economy. This has had very negative impacts both on enterprises competing against informal actors and on national savings and revenue levels.” 

In this regard, agrees the parliamentary advisor, “The industry fears that it is approaching a ‘perfect storm’ in which increased contracting costs will be cumulative and operational difficulties will be greater.” 

“The [hotel] industry fears that it is approaching a ‘perfect storm’ in which increased contracting costs will be cumulative and operational difficulties will be greater.” 

A parliamentary advisor, Chile

Striking a balance between wage improvements and providing adequate support to industries affected by such changes is crucial. Collaborative efforts between the government, industry associations and labour unions can help identify solutions and as the bank director notes, “Minimum wage increases are generally well received by the public, however the data indicates that the welfare gains associated with these increases are minor compared to any decrease in the unemployment rate, central to the discussion surrounding the effects of this wage increase on the hotel industry.” 

Chile’s impending minimum wage increase has sparked debates and concerns within the tourism industry. While addressing income inequality is commendable, potential ramifications on businesses, particularly hotels and restaurants, must be carefully considered. The calls for increased financial compensation from industry associations demonstrate the need to protect the viability of affected sectors.   

Let’s hope Chile can navigate the complexities ahead and ensure a prosperous and sustainable tourism sector moving forward as restrictions and requirements on several fronts simultaneously make the industry unattractive to investors. We’ll be watching …

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