The minimum wage in real terms

Monday August 01 2022
Cash
By Richard Mshomba

As President Samia Suluhu Hassan announced on Workers’ Day, May 1,  civil workers who are paid a minimum wage will apparently see a nominal salary increase of 23.3 percent.

The salary increase took effect in July 2022. Needless to say, salary increases for employees in the public sector were long overdue. The last time their salaries were raised was seven years ago, in 2015. But there is a difference between nominal income and real income.

Nominal income represents what someone earns without taking into account inflation, that is, the cost of living. Real income is the money a person makes, adjusted for inflation. The current discussion on wage increases is limited because those increases are presented only in nominal terms. Salary increases must also be presented in real terms to get a more accurate picture.

Before this year’s salaries increases, the minimum wage for civil employees was Sh315,000.00 a month. Therefore, a 23.3 percent increase would bring it to Sh388,395.00 a month. However, to put this seemingly very large raise in perspective, it is important to consider the increase in the cost of living in the last seven years.

According to data from the Bank of Tanzania, the average annual inflation rate was 4.09 percent from 2016 to June 2022. Thus, just to keep up with the cost of living, the minimum wage would have had to increase to Sh417,000.00 a month this year.

There is no doubt that the increase of 23.3 percent is a huge relief to minimum wage employees, but, in real terms, the minimum wage will still be lower than it was in 2015 – by 7 percent. To put it differently, the nominal minimum wage would have to increase by 32.7 percent to maintain the purchasing power it had in 2015.

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As sad as it may sound, Tanzania’s economy right now does not have the fiscal capacity to bring civil servants’ real wages to where they were in 2015. According to Tanzania’s National Bureau of Statistics (Ministry of Finance), the government spent Sh7.88 trillion on salaries for public workers in 2015.

A very conservative estimate, unrealistically assuming no additional employees and no promotions since 2015, would suggest that in budget year 2022/23, the government would have to spend Sh10.46 trillion to pay salaries. That would be 37 percent of its projected revenue, and Sh0.63 trillion more than what has been budgeted for salaries.

It is unfortunate that public workers’ salaries were frozen for such a long time. It is demoralising to workers. Salaries provide incentives for employees to perform their duties well and with the right attitude.

Some public employees perform just the bare minimum of what they are required to do and often provide services grudgingly because, among other reasons, they are under a lot of financial stress. A number of scholarly studies point out that a link “between low salaries and corruption is that for civil servants with low salaries, corruption becomes a coping strategy to compensate for economic hardship. These need-based arguments focus on the situation in which an underpaid official accepts bribes for basic necessities.” (https://www.transparency.org/files/content/corruptionqas/Salary_top-ups_and_their_impact_on_corruption_2013.pdf)

This is not meant to justify corruption. There are many determinants of corruption, but it would be naïve to think one’s salary has nothing to do with it.

Although the economic reality would make it risky to have public employees’ salaries indexed to inflation, there should be an effort to increase salaries every year. Otherwise, real wages will continue to fall. This nominal increase of 23.3 for minimum wage public employees is a good start.

However, let’s be clear – in real terms, the new salary can buy only 93 percent of the goods and services the salary could buy in 2015.