Proposed minimum wage increase only 16%, according to government figures

The proposed increase in the national minimum wage would make the country’s poorest households only around 16% better off despite looking like a 46% rise, according to Cayman’s leading economist.

Adolphus Laidlow, director of the Economics and Statistics Office, said since the minimum wage was introduced, inflation had decreased its purchasing power by around 25%.

The minimum wage would therefore have to rise from $6 to $7.50 to keep pace with inflation. The proposal of $8.75 is just 16.6% greater than that. (See inflation explainer below.)

The ESO conducted the analysis and polling provided to the Minimum Wage Advisory Committee who then came up with the recommendation.

Laidlow said of his team’s inflation analysis: “It’s about 25% inflation during the period. That’s what we calculated; that the decrease in purchasing power was about 25%.”

He added, “Because the 2016 data was not the data used to set the first minimum wage, so you need to compare the 2013 data and calculate inflation between 2013 and today. We got an inflation-adjusted figure of seven-something.”

But he said poorest households might have been hit harder than the official figures suggest.

“About 36% of the CPI basket [see panel] is housing – rent or mortgage. But it can be skewed by high earners and spenders, especially in a place like Cayman.

“A poor person spends most of their income on accommodation and food, about 70% on those two items.

“I think it [the 2013-2024 period] would be more inflationary for them than for the average consumer. Their costs may be increasing more than average.”

Compass economics columnist Simon Cawdery agreed.

Cawdery said: “On the face of it, $8.75 seems like a real increase above and beyond inflation. So arguably the body has set a number which helps the poorest in society.”

“But at $8.75, if that person works 50 hours a week, 49 weeks a year – they work for a fairly long time – that’s still only an annual salary of $21,400.

“Readers might think ‘Well, I started on that’ but that was a long time ago and inflation in Cayman has been extraordinary, particularly rent.

“Rent disproportionately affects poorer people because they can’t afford to buy houses.

“Food costs have been extraordinary as well; you only need to go around any supermarket.”

Cawdery continued: “So the very basic costs you need to live and survive have gone up disproportionately more than the basket the ESO use – that’s just stating the obvious.”

He accused the committee of “taking the path of least resistance from a statistical basis”, adding, “the minimum wage advisory committee is certainly not the ‘poverty alleviation committee’.”

He went on: “If the purpose of the committee was to help people to live a sustainable and viable life away from poverty, it’s an unambiguous failure.

“Because the starting point in 2016 was a failure, and to use a starting point which was a failure and say ‘We’ve gone slightly further than inflation’, only creates a secondary failure.”

The committee proposes the new rate go into effect in June, with an automatic mechanism to increase with inflation every two years after that.

But before being instituted, the plan will be debated by lawmakers, not all of whom are expected to back the proposal.

Understanding Inflation

What is inflation?

Inflation is the rise of prices over time. A house or a pint of milk has a higher price today than it did for our parents – this is (largely) due to inflation.

What is the effect of inflation?

Through inflation, prices rise. So correspondingly, the value (or purchasing power) of money falls.

 

A gallon of gas might cost $5 one year and $5.50 the next year, but it’s the same gallon of gas. But now you don’t need $5 to buy it, you need $5.50.

 

So the purchasing power of that $5 in your pocket has decreased – it no longer buys you a gallon of gas.

How is inflation measured?

Economists use a ‘basket’ of goods and services which represent typical spending for a household. In Cayman, the basket includes more than 2,200 items from more than 200 providers. The categories including food (551 items), clothing and footwear (273 items), housing and utilities, health, transport, entertainment, education and restaurants/hotels.

 

Each category is given a ‘weight’, to show how much of a typical household’s budget is spent in this area, based on the Household Budget Survey 2015. For instance, housing and utility costs are considered to make up 33% of household spending, whereas restaurants and hotels are only 8%.

 

Economists then check the prices of each of those items on a quarterly or monthly basis, often by literally visiting the suppliers or their websites. Inflation is reported as changes in the Consumer Prices Index.

Here’s an example

If a nurse earns $3,000 per month and it costs $3,000 to house, feed, clothe, and take care of herself and her family, she can afford her monthly essentials.

 

But if inflation is 5%, the next year buying exactly the same things will cost her $3,150 per month.

 

So she will have to cut back to find a $150 saving, or risk going into debt.

 

The purchasing power – the value – of her $3,000 monthly pay cheque has decreased, because it no longer covers the expenditure it covered last year.

 

That is why workers and unions advocate for cost-of-living pay rises, so that their pay keeps pace with inflation.

What does this mean for the minimum wage?

Whether or not the minimum wage was set at the correct level when it was introduced in 2016, its value has decreased since then as prices have risen.

 

According to the nation’s chief economist, prices are 25% higher today than in 2013, which were the prices used to set the minimum wage which was introduced in 2016.

 

So the minimum would have to increase to $7.50 just to be worth what $6 was worth back then.

Why not increase wages faster?

The issue is complicated by the fact that increasing wages also drives inflation.

 

If everyone is earning more, shops put their prices up, which in turn means workers have a stronger argument for higher wages… and on it goes.