Raising the threshold 

A mixed reaction to Chile’s minimum wage increase.

Chile is to increase its minimum wage from 350,000 Chilean Pesos (USD 430) to about 500,000 Chilean Pesos (USD 620) per month. In an announcement made last month, the government said it had reached an agreement with the Workers’ United Centre union. The rise, 14.3%, constitutes the largest single increase in thirty years and will occur in two tranches. The increase was announced at a time when finance minister Mario Marcel is fighting record inflation, 7.7% at time of writing – the highest rate in 14 years, a period of prolonged monetary tightening is the most likely response.  

A member of the board of directors of a national bank in Chile explained, “The reaction of the private sector to the wage increase has been moderately critical. Industry is concerned about the numerous increases in hiring costs, including new regulations and requirements, and shortages in finding workers. These problems derive in part from a series of measures taken by successive governments to protect workers, but also from the financial support measures adopted by the past administration during the pandemic.”

“Industry is concerned about the numerous increases in hiring costs, including new regulations and requirements, and shortages in finding workers.”

Member of the board of directors of a national bank, Chile

Nonetheless, it’s important to put the wage increase in perspective. Whilst the wage rise increases the burden faced by employers, there are currently relatively few employees who work for the minimum wage in Chile, especially in larger companies. Politically, the wage increase announcement could not have come at a more opportune time. Chile’s economy is set to face a technical recession this year, as inflation will erode real wages whilst monetary tightening will squeeze credit access. Household consumption will remain weak so giving Chileans a little extra to take home might help stimulate the domestic economy.   

Can we expect Chile’s leftist constitutional convention to push for further increases during president Gabriel Boric’s first few months in office? A government adviser in Chile added, “The Constitutional Convention is unlikely to push for further reforms soon. The body will welcome any increase to the minimum wage. Aware that political horse-trading with the executive looms as the Convention finalises its constitutional recommendations, it will want to avoid antagonising the executive further. In addition, the body simply does not have time to incorporate wage issues into their recommendations.”   

A government adviser on financial matters opined on the measure’s effect on Chile’s significant informal sector, “Considering the explosive increase in illegal immigration and its impact on informal work, the impact of the increase in the minimum wage on the illegal labour force is null. As a public policy measure it does not benefit those who are in illegality or informality.” 

“Considering the explosive increase in illegal immigration and its impact on informal work, the impact of the increase in the minimum wage on the illegal labour force is null.”

A government adviser, Chile

Ultimately, the increase in the minimum wage will have a minimal effect on well capitalised large and medium-sized companies. However, it could have a more negative effect on smaller and less agile companies. In this way, the measure seems to both sources to be detrimental to the economy at the national level and of very limited benefit to some specific workers. The negative effects of the increase in the minimum wage in conditions of stagnant productivity generate more harm than good for Chile’s national economy. Long Latin America’s star performer, it is starting to falter as an inexperienced team get to grips with the country’s overwhelming dependence on commodities exports.  

 

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