Workforce productivity should improve to reduce the negative effects of inflation and the rise in minimum wage, Ali Chagharvand, the director of Plan Management, Planning and Monitoring Department of Iran Chamber of Commerce, Industries, Mines and Agriculture, said in an article for the Persian daily Ta’adol.
A translation of the text follows:
The Statistics and Economic Analysis Center of the Iran Chamber of Commerce, Industries, Mines and Agriculture has reported that the Purchasing Managers’ Index related to employment dropped to its 17-month low in the month leading to March 20.
The index has been declining in all three economic sectors, with services and agriculture sectors registering the sharpest decline.
Economic players believe that the rise in the costs of production inputs, including wages, has forced companies to lay off employees. In the meantime, many manufacturing and industrial companies are facing labor shortages.
With the sharp increase in the costs of living and its disproportionate link with people’s income, the labor force prefers to work in jobs that generate more money. Overall, the 57% increase in wages set for the current year [started March 21] should be reexamined and analyzed from different aspects.
On the one hand, there are workers who are seeing the gap between their wages and the country’s 40% inflation. On the other hand, there are employers that for reasons such as high costs of production inputs, stagflation, depreciation of local currency and regulatory pricing are facing a decline in profits.
This trend has led to the suppression of the productive sector in favor of the non-productive sector and middlemen; industrial enterprises are grappling with a decrease in production.
The Central Bank of Iran has reported that the 4.1% economic growth of the Q1-Q3 of fiscal 2021-22 is chiefly attributed to the oil sector; the industry, mining and agriculture sectors did not expand; their share in the country’s economic growth was zero.
Recession, downsizing of labor force, increase in informal and unstable employment and prices are among the consequences of wage increase if companies, especially small enterprises, are not supported.
Estimates show that the share of wages in the end costs of large industries is 1-10%; in small and medium-sized industries 30-50% and in the services sector more than 50%
According to the official statistics of the Ministry of Cooperatives, Labor and Social Welfare, a total of 2.4 million people are unemployed, 2.2 million people are underemployed and another two million people are not among economically active populations because they have dropped out of the labor market.
The impact of wage increases on businesses active in services sector, where wage costs account for a larger share of the company’s costs, is far greater than that of manufacturing enterprises. Studies show that although the share of wages in some businesses is relatively high, other costs, especially in the manufacturing sector, put greater pressure on companies.
Compared with other production costs, the share of wage has remained stable. Estimates show that the share of wages in the end costs of large industries is 1-10%; in small and medium-sized industries 30-50% and in the services sector more than 50%.
Another study shows wages accounted for about 18-22% of the expenses of economic enterprises from the fiscal 2016-17 to fiscal 2020-21. Other expenses, such as the cost of machinery, production inputs, raw materials and rental rates have sometimes increased much higher than wages.
Given the economic conditions and the current state of business, improving labor productivity should be prioritized to reduce the negative effects of inflation and the rise in minimum wage. By employing policies on improving productivity and technology, the share of wage increases in companies’ expenditure can be reduced.
According to economic studies, the increase in minimum wage should not exceed the growth of labor productivity. Deviation in wages and real labor productivity will lead to economic inefficiency and decline in employment as well as labor market imbalances.
Labor productivity indices in mining, industry, water, electricity, oil and gas, real estate and other services registered negative growths during March 2011-19; only transportation and agriculture sectors posted positive growth during the period under review.
Statistics also show that the labor productivity index in the overall economy of Iran has increased by 10% during 14 years, i.e. an average growth of 0.7% per year. This index has also registered a negative growth of 11% since fiscal 2011-12.
Finally, failure to curb inflation and carry out structural economic reforms will soon offset the effect of wage increases; it will not lead to an increase in their purchasing power, rather it will have inflationary consequences.
The best solution is to lend support to enterprises and the welfare of workers, avoid getting entrapped in the vicious circle of inflation and wages, carry out structural reforms, control the inflation and increase labor productivity.
Policymakers need to know how to support businesses. Creating economic stability and eliminating destabilizing and unpredictable factors, introducing tax and insurance exemptions, facilitating the provision of foreign-source income and raw materials as well as financing, avoiding interference in the economy and eliminating mandatory pricing along with increasing labor productivity will offset the inflationary effect of pay rises and improve business environment.
