The Minimum Wage System in Ethiopia: a Comparative Analysis

A minimum wage is the lowest wage that employers may legally pay to workers. The purpose of minimum wages is to protect workers against unduly low pay and they are essentially labour market interventions used by governments either as instruments of political macroeconomics or as social tools. Governments introducing minimum wage policy and legislations basically aim to protect low-income workers through the introduction of minimum wages based on country specific factors.

In case of Ethiopia the new labour proclamation which is entered into force in 5th September, 2019 for the first time provide establishment of minimum wage board that will periodically revise minimum wages based on different factors. Since the new minimum wage board in Ethiopia is a new conception it is not perfect in addressing all issues and problems that exist in the implementation of the purpose intended by the government. So this article has employed different sources and explores the minimum wage system in Ethiopia special focusing on new labour proclamations by consulting other countries better experience in tackling those unseen problem and for having strong minimum wage system in the country.

 

1. INTRODUCTION

 

The Wage Boards help to resolve the disputes in a democratic manner by bringing the parties together, without compulsion on either side. The first wage board was set up in 1957 in the Cotton Textile Industry. Thereafter number of wage boards for different industries have been set-up. These boards are appointed by the Government purely on an adhoc basis on the demand of the Trade Unions and employers. Although at the time when the International Labour Organization was established, minimum wages had only been set in a few countries, including Australia, France, New Zealand, Norway and the United Kingdom, and only covered certain categories of Workers.

Wage boards would help increase productivity in several ways. First, higher wages help reduce turnover and encourage innovation. Second, similar pay for similar work enables a more efficient allocation of resources, which speeds up the movement of labor and capital from low- to high-productivity activities. Third, by elevating conflict about pay scales to outside the firm, wage boards can enable greater collaboration within the workplace. Fourth, wage boards promote worker training by minimizing the employees’ financial incentives to leave firms once they are trained. fifth, by making the rationale for pay increases clearer and more transparent.

Ethiopia is one of the developing countries with low per capita income, which is $783. The wage being paid at manufacturing sectors might be one of the reasons for the low per capita income and the creation of the working poor. Although some public sector institutions and enterprises have set their own minimum wages, there is no consistent minimum wage system in Ethiopia. In response to this situation, a labor proclamation which is drafted by the MOLSA to establish a Commission to set a minimum wage is entered into force in 5th September, 2019. The proclamation will not set a minimum wage rather establish a commission that set a base wage across time depending on the economy, cost of living and other factors in order to avoid the hassle of revising the proclamation repeatedly. The new labour proclamation is believed to solve recurrent issues demanding for salary increment, and other work related issues raised by workers particularly in manufacturing sector.. Since the new minimum wage board is a base for establishment of minimum wage system in Ethiopia. So under this article enacting laws for having a minimum wage system is not a goal by itself for expected result. So we need to explore the minimum wage system in Ethiopia special focusing on new labour proclamations.

With the view to address the above raised issue the article is organized into four sections. Following this introductory section, section two deals with the general overview minimum wage system, along with genesis of minimum wage system the third section analysis  regarding the minimum wage system of Ethiopian new labour proclamation focusing on the experience of selected national laws of some Countries  indicating lessons that can be learned by Ethiopia from experience of these selected countries. Finally the articles winds up by addressing conclusion and recommendations.

 

2. BRIEF OVERVIEW OF MINIMUM WAGE SYSTEM

 

A minimum wage is the lowest wage that employers may legally pay to workers. While precursors go back to the Hammurabi Code, 2000 B.C., the practice of minimum wage regulation is generally considered to have first developed in New Zealand and Australia around the turn of the century. Initially, it was used in these two countries as part of the procedure for the prevention and settlement of industrial disputes. Under the New Zealand Industrial Conciliation and Arbitration Act of 1894, the Court of Arbitration was empowered to settle industrial disputes by issuing awards fixing minimum wages that could be made binding for all workers in the industry in the district where the dispute had taken place.      Other countries soon followed suit in providing protection against unduly low wages, with the difference, however, that the protection was confined in most cases to particular categories of workers considered to be especially vulnerable.  

The first minimum wage laws introduced in the United States were different in that the vulnerable categories of workers singled out for protection were females and minors. In 1912 and 1913 nine states adopted such minimum wage laws, and by the end of 1923 the number had grown to 17.    Legislation introducing similar minimum wage regulation systems with a broad purpose and scope was introduced in a few other Latin American countries around the same time (Costa Rica and Cuba (1934) and Brazil (1938)).

Regarding Africa, legislation on minimum wages was adopted quite early in many parts of Africa, it was not until the 1940s and 1950s that effective laws and a number of minimum wage fixing decrees were implemented on a significant scale. The systems of minimum wage regulation introduced at this time were heavily influenced by the colonial ties of most of the countries of the continent. In most of the British colonies minimum wage regulation, although authorized by legislation, was not extensively or regularly practiced. In the other African countries subject to a quite distinctive external influence, minimum wage regulation also developed in the post-Second World War period. Thus in Egypt and Libya, although there is no regularly operating minimum wage fixing machinery, decrees or laws fixing minimum wages have been issued from time to time. In the Sudan general minimum wages were declared in 1974 for the first time for workers in establishments with ten or more workers, in major urban areas or developed regions.

Moreover, often minimum wage regulation is regarded as a key determinant of general wage movements and structures. Currently, out of 187-member states of ILO 8% of them have no minimum wage at all, note that countries, where minimum wage applied to all or part of the private sector, were counted as having a minimum wage.

Minimum wages have been defined as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract. Minimum wages represent the lowest levels of pay, established through a minimum wage fixing system, to be paid to workers by virtue of a contract of employment. Minimum wages have three aspects: a) the remuneration for work performed by the worker, b) the workers’ basic income (and source of purchasing power), c) a production cost. Minimum wages can be set by statute, collective bargaining agreements, decisions of national boards, or arbitration awards.

   Regarding ILO in time when ILO committee made a survey on minimum wage they emphasize that there is no instrument defines the term “minimum wage” in compressive way. The Committee considered that the minimum wage may be understood to mean “the minimum sum payable to a worker for work performed or services rendered, within a given period, whether calculated on the basis of time or output, which may not be reduced either by individual or collective agreement, which is guaranteed by law and which may be fixed in such a way as to cover the minimum needs of the worker and his or her family, in the light of national economic and social conditions”.  

   So,  Generally from among  the above insertion we can adduce that Minimum Wage means the smallest amount of money or remuneration that an employer is required to pay for wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract regardless of the method of fixing them. 

 

2.1 THE COMPONENTS OF THE MINIMUM WAGE

   

A number of national laws do not indicate the elements of remuneration that make up the minimum wage, and among those that contain indications on the subject, it is difficult to identify general trends due to significant differences on the following points: the inclusion of the basic wage only or, on the contrary, the inclusion of all or part of bonuses, tips, commissions, allowances and other additional payments; the taking into account of only money wages or, where applicable, also the cash value of benefits in kind; and the indication of whether or not “wages” within the framework of the legal provisions on the minimum wage, exclude overtime pay. The legislation in several countries simply provides that only the basic wage is taken into account for the purpose of the minimum wage. This is the case, for example, in Antigua and Barbuda, Chile, Hungary, Malaysia and the former Yugoslav Republic of Macedonia. 

So generally in many cases, total wages or earnings include different components, such as: basic pay annual bonuses, tips, in-kind benefits, productivity and performance pay, allowances and premiums for non-standard work hours or dangerous work. But Convention No. 131  does not explicitly indicate the elements to be included in the minimum wage. So clarity is needed for a minimum wage policy to be operational.

 

2.2. PURPOSE OF MINIMUM WAGE

    

The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a just and equitable share of the fruits of progress to all, and a minimum living wage to all who are employed and in need of such protection. In other word the purpose of minimum wage laws is to stop employers from exploiting desperate workers. The minimum wage should provide enough income to afford a living wage. That is the amount needed to provide enough food, clothing, and shelter. Although the minimum wage protects workers from exploitation, it hasn't kept pace with inflation. Minimum wages can also be one element of a policy to overcome poverty and reduce inequality, including those between men and women, by promoting the right to equal remuneration for work of equal value. Minimum wage systems should not be seen or used in isolation, but should be designed in a way to supplement and reinforce other social and employment policies. Several types of measures can be used to tackle income and labour market inequality, including pro-employment policies, social transfers, and creating an enabling environment for sustainable enterprises. The purpose of a minimum wage, which sets a floor, should also be distinguished from collective bargaining, which can be used to set wages above an existing floor. In modern times, minimum wage law also serves the purpose of establishing a "living wage"--mostly for lower-class families that depend on the manual labor jobs which often pay the least.  

 

2.3 IMPORTANCE AND IMPLICATION OF INTRODUCING MINIMUM WAGE SYSTEM

 

Under this topic the writers tries to elaborate reasons that necessities countries for the introduction of minimum wage system in their legal system.  Governments introducing minimum wage policies basically aim to protect low-income workers through the introduction of minimum wages based on country-specific factors such as the cost of living, welfare Policies, labour market conditions, the inflation rate and other economic factors and trends. The rationale driving decisions to introduce minimum wages is related to:

Fairness/ reducing inequalities- Minimum wages aim at decreasing wage inequalities between the bottom and the middle of earnings distribution. The same idea of fairness is often incorporated into social welfare, which governments seek to maximize, also as a political strategy.

2. Poverty alleviation-Minimum wages are often associated with poverty reduction, but in reality have been acknowledged as ineffective in alleviating poverty as they are not well targeted to the poor.
3. Imbalance of power in the employment relationship-Minimum wages are said to mitigate the potential effects that could arise from the power imbalance between enterprises and workers, which might lead to workers accepting lower wages to obtain employment.

Incentives to work-Minimum wages could be justified within the framework of incentives, by motivating unemployed individuals to enter the workforce if the minimum wage is greater than benefits received through social support. Furthermore, minimum wages can increase the effort made by workers, as the rewards increase and the opportunity costs of losing the job become higher.

 

2.4.  LEGAL INSTRUMENTS OF MINIMUM WAGE SYSTEM

  

The UDHR is a milestone document in the history of human rights. Drafted by representatives with different legal and cultural backgrounds from all regions of the world, the Declaration was proclaimed by the United Nations General Assembly in Paris on 10 December 1948. It sets out, for the first time, fundamental human rights to be universally protected. Article 23(3) of UDHR recognizes the right of persons to get just and favorable remuneration so as to ensure “an existence worthy of human dignity”. The American Declaration of the Rights and Duties of Man, adopted by the Ninth International Conference of American States in 1948, is drafted in similar terms to the Universal Declaration of Human Rights. There are also other international documents like ICCPR and ICESCR and now a days many of its provisions are incorporated into universally accepted customary international laws. Article 7 of ICESCR also recognized the right to fair wage and a decent living as a result of just and favorable conditions of work.  Ethiopia is acceded to this covenant since 11 June 1993. In the context of the Council of Europe, Article 4 of the European Social Charter (revised), 1996, recognizes the right of workers to fair remuneration. 51 More specifically, States parties undertake to recognize the right of workers to remuneration sufficient to ensure for them and their families a decent standard of living.

  

In Africa  the Organization of African Unity, the predecessor of the African Union, adopted at the session of its Assembly of Heads of State and Government in 1981, the ACHPR (also known as the Banjul Charter), which entered into force in 1986. The Charter only contains a general provision under Article 15 that every individual shall have the right to work under equitable and satisfactory conditions, and shall receive equal pay for equal work. However, the African Commission on Human and People’s Rights, established under the Charter, adopted in 2010 “Principles and Guidelines on the Implementation of Economic, Social and Cultural Rights in the African Charter on Human and People’s Rights”. With respect to Article 15 of the Charter, the Principles and Guidelines indicate that “access to equitable and decent work, which respects the fundamental rights of the human person and the rights of workers in terms of remuneration can be critical for both survival and human development”. More specifically, this instrument elaborates that the right to work includes the obligation of the State to ensure the right of everyone to equitable and satisfactory conditions of work, including, among others, fair remuneration.

    

Now let us see Minimum wage under ILO. It is clear that the main document that regulate minimum wage is ILO constitution. Although at the time when the ILO was established, minimum wages had only been set in a few countries, including Australia, France, New Zealand, Norway and the United Kingdom, and only covered certain categories of workers. Finding ways to ensure the payment of decent wages has been a fundamental concern of the ILO since its foundation. The original Constitution of the Organization, established in 1919, listed the provision of an adequate living wage among the improvements in conditions of labour urgently required to combat social unrest and promote peace.  It specified as an objective for member States the payment to the employed of a wage adequate to maintain a reasonable standard of life as this is understood in their time and country. Then the issue of minimum wage fixing could be considered by the 1927 session of the International Labour Conference and For the first time in the history of the ILO, the issue of minimum wage was the subject of a double discussion procedure, which resulted in the adoption of the Minimum Wage-Fixing Machinery Convention, 1928 (No. 26), and Recommendation, 1928 (No. 30). With more than 100 ratifications, Convention No. 26 remains to this day one of the most widely ratified ILO Conventions. It is complemented by Recommendation No. 30, which calls for the participation of women in wage-fixing bodies and for strong enforcement measures to protect law-abiding employers from unfair competition. But still now Ethiopia is not a signatory to this convention. Adopted after the world had witnessed its worst economic crisis and in the final months of the Second World War, the 1944 Declaration concerning the aims and purposes of the ILO (known as the “Declaration of Philadelphia”, which forms an integral part of the ILO Constitution), reaffirmed that “poverty anywhere constitutes a danger to prosperity everywhere” and advocated world programmes that will achieve "a minimum living wage to all employed and in need of such protection". In the second half of the twentieth century, a Conference made an effort to extend minimum wage protection to hitherto excluded categories of workers. The Wages, Hours of Work and Manning (Sea) Convention, 1946 (No. 76), for the first time, set a specific amount for the minimum wage for seafarers. Then the adoption of the Social Policy (Non-Metropolitan Territories) Convention, 1947 (No. 82),and at the national level, the regulation of wages in agriculture developed between the two world wars, and the examination of this national legislation facilitated the preparatory work for the Minimum Wage Fixing Machinery (Agriculture) Convention, 1951 (No. 99), and the Minimum Wage-Fixing Machinery (Agriculture) Recommendation,1951 (No. 89). These convention is an extension of minimum wage protection to previously excluded categories of workers.

 

Then In 1970, ILO adopted the Minimum Wage Fixing Convention, 1971 (No. 131), which is considered to offer broader protection than that envisaged by ILO Convention No. 26. This convention No. 131 encourages member States which ratify to establish a system of minimum wages.  The ILO Minimum Wage Fixing Convention, 1970 (No.131) and its Recommendation (No.R135) are meant to help ILO member states establish a system of minimum wages. The key objective is to give wage-earners the necessary social protection in terms of minimum permissible levels of wages. In addition to establishing minimum wages, these standards address an  important issue not addressed by ILO Convention No. 95, namely underpayment of a minimum wage, which is addressed in ILO Convention No. 131. Article 2, Paragraph 1 of ILO Convention No. 131 addresses this and further suggests that “appropriate penal and other sanctions” be applied in national law to address any failures to pay the minimum wage.   other ILO conventions, such as the ILO Labour Inspection Convention, 1947 (No. 81) and the ILO Labour Administration Convention, 1978 (No. 150) provides  labour inspection plays in ensuring accurate wage payments, and  Article 21 of ILO Convention No. 81 requires that the labour inspection service compile a report on all investigations conducted during a calendar year. By the end of 2019, Convention No. 131 had been ratified by 54 member States. Ethiopia is not a signatory to this convention until now.

 

3. THE MINIMUM WAGE SYSTEM IN ETHIOPIA: COMPARATIVE ANALYSIS

3.1. INTRODUCTION

   

As it has been explained in the preceding part minimum wages represent the lowest levels of pay, established through a minimum wage fixing system, to be paid to workers by virtue of a contract of employment. In many cases, total wages or earnings is also include different components, such as: basic pay annual bonuses, tips, in-kind benefits, productivity and performance pay, allowances and premiums for non-standard work hours or dangerous work and there are immense differences between countries in terms of administration of minimum wage system. Countries have also their own way of setting minimum wage rates set for different regions and/or different occupations, age, qualifications, etc. within the same country.

  

This part of the Article primarily deals with Ethiopian minimum wage system based on laws and policies focusing on minimum wage of workers those covered by the labour proclamation. The issues are dealt with special consideration of others countries minimum wage system and draw comparative analysis with best practices of countries selected for these article.. Specifically this part of the article is the main part devotes to cover the following concepts. It begins with this introduction that high lights the chapter and minimum wage policy and effect of lack of minimum wage laws as well as need of introducing minimum wage system in the new labour proclamation.

   

Under this Article the writer clarifies effect of lack of minimum wage system in Ethiopia, reason that necessitate Ethiopia to introduce minimum wage board in its law, impact of introducing minimum wage system in Ethiopia specially in protecting employee right in one side and attracting investment in other side, characteristics of Ethiopian newly minimum wage system, how Ethiopia’s minimum wage system is regulated and administered which is related with legal and institutional arrangement and finally  the possible draw backs and challenges the country may face in implementing the new minimum wage system will be addressed.

 

3.2. EFFECT OF LACK OF MINIMUM WAGE SYSTEM IN ETHIOPIA.

 

Minimum wages have been widely introduced to protect the workers against; unduly low pay, achieve various economic and social goals namely: overcome poverty and ensure the satisfaction of the needs of all workers and their families, give wage earners necessary social protection as regards minimum permissible levels of wages, reduce wage inequality, set a wage floor, contribute to establishing rules of game that are equal to all and reinforce social dialogue. Its importance has been recognized in the international labour standards. Researchers  Sara L. Rynes, Barry Gerhart, and Kathleen A. Minette says the problem of absence of minimum wage law is reflected on the value of knowledge, because absence of minimum wage law encourages employers to employee with lowest wage and this discourages those who spent their time for study and researches, wage in developing countries have motivational factor.  

  

There exist many effects regarding lack of minimum wage system in Ethiopia. First lack of minimum wage has an effect of creating persistent exploitation, unjust living standard and economic inequality with high income gap. The absence of minimum wage law results in lack of equitable benefit sharing from effort, all goes to one party, the investor and a study revealed that minimum wage accounted for as much as 80% of the growth in wage inequality. This economic inequality by itself creates instability in the state, economic instability grows to political unrest and what we are perceiving in our country is resulted from this problem. Here Not only this, minimum wage law may not be a solution for income inequality because the experience of many states tells that there is no relation between having minimum wage and income equality or vis versa. For instance, there is no minimum wage law in Sweden, the law provides for right of workers to form and join independent unions to bargain wages collectively, and it prohibits antiunion discrimination.Other study conducted in Mexico regarding the effect of the minimum wage in urban Mexico on income inequality reveals that Higher real minimum wages reduce wage inequality among peoples.According to CIA World Fact Book based on World rank-high income inequality even if Ethiopia has no Minimum wage law but regarding payment of wage Ethiopia ranks 113 globally. Second Employment income tax is one source of revenue for the Ethiopia government, this means whenever the income of individuals increases it has a positive effect on the revenue of government, in the present context of Ethiopian wage the government cannot get appropriate tax from employment income tax. Third it has created poor social security system: the wage of the worker has effect on the social security system like pension, under Ethiopian law retirement gratuity is highly affected by the wage of the worker, countries with better minimum wage law have good standard of living for their citizens and if not, the society pays for the failure.

  

So generally introducing such system in Ethiopia is an important intervention tool for protecting workers and ensuring a decent standard of living for them and their families, contributing to improved productivity and an increase in employment by stimulating consumption. It drives up the average wage, thereby leading to potential positive impacts on consumption and employment.

 

3.3. IMPACTS OF MINIMUM WAGE SYSTEM IN ETHIOPIA ON PROTECTING RIGHT OF EMPLOYEES AND ATTRACTING OF INVESTMENT

 

Governments introducing minimum wage system basically aim to protect low-income workers through the introduction of minimum wages based on country specific factors such as the cost of living and other employee rights. In Other side FDI is often seen as a driver for economic development as it may bring capital, technology, management know-how, jobs and access to new markets. Policy-makers have, therefore, tended to emphasize the benefits that FDI can bring to host economies, particularly in developing countries. Accordingly, many governments have developed policies to encourage inward FDI. So introducing minimum wage laws in their system is taken as an indirect encouragement of investment.   So our new labour proclamation provides a better expectation for the employee for having adequate wage to ensure the wellbeing of many workers in one side and Investment wage rate is one of the factors that affect attracting Investment specially Foreign Direct Investment in many developing countries including Ethiopia in other side. So under these section we try to see impact of these two competing interest on newly Ethiopian minimum wage system.

 

3.3.1.  IMPACT ON PROTECTING RIGHT OF EMPLOYEE

 

To protect and to increase labor welfare, the government issued minimum wages regulation. Although the purposes of the minimum wage policy were widely accepted, there is great disagreement about whether the minimum wage is effective in achieving its objectives. One of the intended purposes of minimum wages is to improve the economic conditions of those employee at the bottom of the wage distribution thereby reducing both inequality and the number of working poor. In spite of a large literature, the questions of whether minimum wage adjustments actually reduce wage inequality remain controversial and empirically ambiguous, depending on the country context including the way in which minimum wage policy is carried-out.

  

Here before analyzing the impact of setting minimum wage on right of employment it is better to see those arguments and studies made on the impact of level of minimum wage and labor market outcomes, particularly employment and unemployment rates. How minimum wages affect employment has been the most prominent issue with respect to the evaluation of minimum wage policies, and indeed one of the most researched topics in economics. The question is clearly important from a policy perspective, as any potential benefits of the minimum wage in terms of higher earnings are offset by adverse employment effects that may result. But the employment effects of minimum wages are also significant to economists because they provide a means of testing alternative models of the labor market. The impacts of minimum wage laws, and their desirability, have been debated in textbooks and in policy circles for decade elsewhere in the world. The standard elementary treatment of minimum wage policy views its impact as unambiguously negative.In a competitive market where unrestricted supply and demand forces combine to determine a unique equilibrium employment and wage level, the imposition of a minimum wage greater than the market-clearing wage creates true unemployment.Here Brown in his study provides  level of minimum wage and employment rate has negative correlation. The majority of empirical studies of minimum wage effects on employment and unemployment  have found small, but generally statistically significant, negative impacts of minimum wage increases on the employment rate of “at risk” groups.  However, in a number of cases no significant employment effects have been found, and in a few event studies of the minimum wage, prominently featured in Card and Krueger there were indications of positive employment effects. Card and Kruger in their study provides even reasonably substantial increases in minimum wage rates may have no, or even positive, effects on employment levels.

 

From the analysis it can be concluded that minimum wage policy has multiple impacts on growth, the labor market, and households. The simulations show that a rise in wages in urban and rural areas has differential impacts for rural and urban areas. Further, the results reveal that increases in wages would lead to an increase in the price level, thereby, indicating that the policy contributes to inducing inflation in the economy. Finally, a rise in wages has overall a positive effect on household income and consumption, as well as on government income. This in conclusion is shows an overall positive effect of minimum wage.

  In case of Ethiopia CETU in 2012 E.C in its Country Situational Report provides the precarious employment is one of the problems which the Ethiopian workers are facing now. In such a case, workers are not in a position to enjoy their right to occupational safety and Health. The payment, whatever you call it, is not livable. Job insecurity is one of its characteristic features. The national minimum wage was introduced because of to increase income for workers and to improve their living standards.  So it has to properly function to achieve the intended result. The newly provided Ethiopian minimum wage board has a purpose of setting minimum wage for workers.so such Minimum wage regulation prohibits the payment of wages below a specified threshold. So such regulation has the following advantage for Ethiopian workers. Firstly, such legislation is to sustain the living standards of low-paid workers. In other word the minimum wage represents a basic requirement and a good way of improving or maintaining the standard of living of the low-paid and their families. Secondly, the minimum wage is a way of protecting vulnerable workers who are not able to organize and thus prevents exploitation. Thirdly, such minimum wage legislation is a means of redistributing income from capital to labour. Finally, negotiations around the minimum wage promote social dialogue. So that is why the arguments in favor of minimum wages have gained momentum in Ethiopia as an important intervention tool for protecting workers and ensuring a decent standard of living for them and their families, contributing to improved productivity and an increase in employment by stimulating consumption

   However, from the employer’s point of view, setting minimum wage have also its own positive impact. Firstly, the minimum wage is a way of raising productivity by motivating workers. that means if a firm willing to pay their workers with a wage higher than the previous customs wage , it will motive them to be more responsible in their task. Secondly, uniform wages, such as the minimum wage, contribute to reducing labour turnover, which can be very costly for firms. Thirdly, the minimum wage strengthens social cohesion and is a way for employers to ensure social peace by avoiding conflicts among workers. From government point view introducing minimum wage system in Ethiopia has also its own positive impact. Governments, a major purpose of the minimum wage is certainly to contribute to alleviating poverty. The minimum wage can act as a social safety net in countries where social security is as yet little developed. Governments have also used the minimum wage to redistribute income in society, to promote productive employment and to enhance demand driven growth.

   Even if having minimum wage law by itself is not a goal for one country to achieve the intended purpose. It is better to follow the general operation of the system in detail. The impact of the minimum wage on employment will vary by economic sector, type of worker depending on production technologies, and, in particular, the degree of substitution between types of skills. For example, a minimum wage can reduce the employment of low-skilled workers but increase the employment of high-skilled workers.  So increment and adjustment process should be seen strictly by balancing the interest of general countries economy and right of workers.  For Example Small and regular increases in the minimum wage are better than brutal adjustments following years of stability in nominal terms. In these area Ethiopia should take lesson of Vietnam by which, sizeable increases in the minimum wage were estimated to have no negative effect on the level of employment. Additionally Nguyen in his study based on empirical evidence of the employment effects of minimum wages  in the year 2014 which is made in Vietnam  reveals that a small decrease or increase in employment (with an elasticity of around -0.1) have a positive effect on  employment.  Regarding labour force Ethiopia’s labour force survey shows paid employees representing only 10 per cent of the working population in 2013, while “unpaid family workers” and “self-employed” account for the highest shares of the country’s registered labour force.

 

3.3.2.  IMPACT ON ATTRACTING INVESTMENT

 

   In general term investment is often seen as a driver for economic development as it may bring capital, technology, management know-how, jobs and access to new markets. Policy-makers have, therefore, tended to emphasize the benefits that investment can bring to economies, especially in developing countries. There exist many factors that necessitate investor to invest in host state. Especially regarding FDI, such type of investment bring bundle of benefit for the host country. It is clear that the investment made in the host state definitely will enhance the economic development of the host state. It would create an employment opportunity for the residents of the host state and other benefits emanate from investments. However many people argues specially for developing countries which have no enough economy and seek many investment packages  for investors in order invest in developing country one of bundle advantage is access of cheap labour. So if such developing countries have established wage board that determine minimum wage based on economy it is not the interest of the investor to invest there. Here wage rate is among factors that affect FDI. A major incentive for a multinational to invest abroad is to outsource labour-intensive production to countries with lower wages. If average wages in the US are $15 an hour, but $1 an hour in the Africa-continent, costs can be reduced by outsourcing production. This is why many Western firms have invested in factories in the Africa-continent.

     In Case of Ethiopia investment is essential for the development of an economy. Development becomes a right of people in general. A right to development is provided under the provisions of Art. 43 of the Constitution. Hence, the people of Ethiopia, and nations and nationalities have the right to sustainable development. What is most important is that international agreements to which Ethiopia is a party must promote our right to sustainable development. Therefore, our government is duty bound to ensure that foreign investment agreements promote the right of development of our people.  The investment objective of the Federal Democratic Republic of Ethiopia is to improve the living standard of the peoples of Ethiopia by realizing a rapid, inclusive and sustainable economic and social development. To create more and better employment opportunity for Ethiopians and advance the transfer of knowledge, skills and technology required for the development of the country is another particular objective of Ethiopian investment law.

    Even if the objective of investment is one provided above an investor needs natural and human resources in a reliable manner to produce or manufacture. Thus, the investor could be attracted by the abundance of natural and human resources available in developing countries. An investor will prefer to invest in a country where human resources needed for the manufacture of his/her/its produce are available in a large quantity and at a cheaper in price. In addition, an investor will be attracted to invest in a country where skilled, disciplined and cheap labour force is found, other factors being equal. So cheap work force is another area that offers a good opportunity for investment in Ethiopia Workforce is abundant in Ethiopia. In addition, it is inexpensive. So if a minimum wage is set in Ethiopia it seems it have some effect in attracting investment to the country.

   But, minimum wages and more generally labour costs are not the main variables that investors compare. At least, they are not what investors should be comparing. Foreign investors should compare many factors before investing in a given country, including political stability which means First and for most, an investor needs to make sure that the political climate is stable and predictable because it has a direct impact upon investment, exchange rates and unit labour costs, which are the cost of labour per unit of output, rather than just labour costs. Trends in labour productivity and the transparency of the minimum wage system seem crucial, particularly at a time of renewed emphasis on sound managerial practices.. Different Report reveals that having minimum wage system is not a reason for the decline of inflow of investment in Africa including Ethiopia. But two factors are pointed out as reasons for the decline in the inflow of FDI in East Africa. These concern the fact that the sub-region is poor in resources, and there is a political instability. As a result the inflow of FDI into Ethiopia, Kenya, Madagascar and Mozambique declined in 2005. . The skills and qualifications of workers remain low, however. In addition, the industrial relations are sometimes a problem.  The fact that there are too many labour cases in courts may be taken as an indication of the fact that industrial relations are not smooth.  

    So in general for Ethiopia introducing a minimum wage system in its labour code has no negative effect(even if further study required) in attracting investment since if the government works on other factors that affect for attraction of investment. The government is required to make the minimum wage system transparency, efficient and predictable.

 

3.4. REGULATION AND ADMINISTRATION OF MINIMUM WAGE SYSTEM IN ETHIOPIA.

 

   This section of the article   primarily deals with Ethiopian minimum wage system based on laws and policies focusing on minimum wage of workers those covered by the labour proclamation. Minimum wages are known to have profound impact not only on the labour market but also the whole economy. In this regard, it is crucial that the minimum wage system should be managed in ways that maximize its benefits while minimizing its potential negative impacts. In order for societies to safeguard that wages are paid in an accurate and timely fashion policymakers need to ensure that policies and laws are developed to provide guidance as to how this should be done and what the consequences are when this does not happen. Many countries around the world have sought to develop wage protection legislation, even though their form and method may vary. While it is important to determine the key issues that should make up wage protection legislation it is also vital to develop best institutional arrangement for enforcement of this type of minimum wage legislation.

  Since the arguments in favor of minimum wages have gained momentum in Ethiopia as an important intervention tool for protecting workers and contribute for improved economy and in response to this situation, Ethiopia adopts new labour proclamation which establish a wage board who has a responsibility to set a minimum wage by taking many factors into consideration. So under these section the writer try to elaborate policy and laws of minimum wage which are embodied in Ethiopian law or try to make details us to the general legal frame work of Ethiopian minimum wage system as well as regarding its administration aspect the writer wants to explore the institutional arrangements of Ethiopian minimum wage system by making comparative analysis as the case requires..

 

3.4.1. LEGAL FRAMEWORK OF MINIMUM WAGE SYSTEM IN ETHIOPIA

 

    Minimum wages are known to have profound impact not only on the labour market but also the whole economy. In this regard, it is crucial that the minimum wage system should be managed in ways that maximize its benefits while minimizing its potential negative impacts. It is not uncommon, especially in developing and transition countries, that well-intended policy decisions on minimum wages lack solid evidence and analysis and thus defies their goals. Therefore, good policies and legislations regarding minimum wages are a very important issues.  In order for societies to safeguard that wages are paid in an accurate and timely fashion policy makers need to ensure that policies and laws are developed to provide guidance as to how this should be done and what the consequences are when this does not happen. Many countries around the world have sought to develop wage protection legislation, even though their form and method may vary. But, the Government’s objective is to lift the wages of low-paid workers, and increasing the minimum wage us one part of policy objective.

  A wide range of rationales have been put forth to justify legislating minimum wages and, to some extent, the motivation for the policy shapes labor regulations in each country. In terms of  setting wage policy, most countries around the world have adopted wage-setting policies, typically through the legislative process, by establishing laws or by giving legal force to the terms of collective agreements negotiated among employers, trade unions, and employees. Such laws or rules for wage bargaining between employers and workers are
aimed at decreasing the likelihood of exploitation and reducing the number of working poor. Despite the intuitive political economy appeal of the minimum wage policy, it remains a somewhat controversial policy instrument because policymakers often seek to achieve multiple objectives with minimum wages, and adjustments are sometimes made on ideological grounds rather than based on technical analysis. Countries differ greatly in the goals they want to achieve when establishing and modifying their minimum wage policies. Based on evidence from around the world, countries can be grouped loosely into three groups according to their goals: the first group of countries aims to reduce poverty and inequality by increasing wages of low-income workers. the second group seeks to promote productivity growth; and the third group seeks to address efficiency issues in the labor market that lead to negative consequences on employment and workers. There are also countries that seek to use the minimum wage policy to meet all three goals depending on their country context. 

     In some countries, the minimum wage policy affects non-wage benefits (social insurance, pensions, among others), which affects a wider group of workers and hurts overall worker welfare. For example, in Vietnam the minimum wage is related to the social insurance contribution. the social security administration uses the minimum wage as a base for calculating the compulsory social insurance contribution by firms.

   Regarding Minimum wage policy and laws in Ethiopia previously there is no provision in the labour proclamation which provide about minimum wage law in the country and the issue is left for parties’ agreement. In that time investors take the civil service minimum wage as a defacto minimum wage. Concerning Minimum wage policy there is no separate policy which provide about minimum wage in Ethiopia. Moreover, the National Employment Policy and Strategy, drafted in April 2016 sets a framework favorable to the implementation of wage policies, the foreword pointing to the fact that “it is recognized that poverty is less an outcome of open unemployment than of low labour productivity and inadequate levels of income”. Indeed, employment policy number 2 (“creating favorable conditions for the promotion of employment opportunities by improving the functioning of labour market information and employment services”) is developed through 7 strategies, one of them aiming at the establishment of a system to determine minimum wages taking into account the country’s stage of development, competitiveness and the capacity to pay. The second Growth and Transformation Plan (GTP II),aims for instance at reducing the share of the population below the national poverty line from 23.4% to 16.7% by 2020. According to the first pillar of the strategy set out in the GTP II (“Sustained the rapid, broad based, and equitable economic growth and development witnessed during the last decade”), the growth acceleration should contribute to the realization of the country’s medium term vision of becoming a lower middle income country where social justice and equity prevail.  Minimum wages in Kenya are specified as part of a national wage policy set in place before independence and guided by the Regulation of Wages and Conditions of Employment Act. But in Ethiopia there is a single article is embodied in the new labour proclamation which only provide about establishment of Minimum wage board. So Ethiopia needs a National wage policy which is a base for legislation which have a relevance for the proper achievement of multiple purpose of minimum wage system. therefore the country GTP plan should give concern for the national employment policy strictly. Regarding laws Ethiopian labour code simply provide about establishment of minimum wage board. Let start from the definition of wages. Here the labour proclamation didn’t give a definition for minimum wage rather the proclamation starts by giving definition for what wage is only. For the laws in other
countries the baseline of the legal definition of wages begins with the minimum wage level. In Cambodia 1997 of Cambodia Labour Code provides broader definition regarding minimum wage and give special emphasize under separate legislation in labour code. There is also a similar fashion In Vietnam labour code. Such thing give better wage protection this can be important as it defines what payments an employer is expected to pay to a worker, and can be the focus of the worker for legal action if underpaid or not paid in a timely manner for the worker. For example, Article 1 of ILO Convention No. 95 defines the term wages in broader manner for making better protection of workers’ rights, But Ethiopia is not a signatory to these convention until now. So Ethiopian labour proclamation lacks such intensity and what minimum wage is  may be the subject of tension between the social partners in Ethiopia.  Regarding components of remuneration that make up the minimum wage our labour proclamation also didn’t specifically provided in our labour proclamation. But simply it seems that only the basic wage is taken into account for the purpose of the minimum wage.

   So generally regarding clear recognition of minimum wage Ethiopia labour code didn’t give separate and clear room concerning minimum wage unlike Vietnam, Cambodia and Tanzania which make detail provisions in their Labour Code to ensure that workers receive a minimum wage.

 

3.4.2. INSTITUTIONAL ARRANGEMENT FOR DETERMINATION OF MINIMUM WAGE AND ITS CHARACTER IN ETHIOPIA

 

   The methods of fixing minimum wages include a broad and varied range of practices that are not easily categorized. The law and practice in the world clarifies in some states minimum wage is fixed by the public authorities without the requirement of prior consultation of employers’ and workers’ organizations. In other state minimum wages are fixed by the government after consultation with the social partners.  In many case minimum wage is fixed by collective agreement or by legal mechanism including government decision or by certain bodies established for purpose fixing minimum wage. In other word Minimum wage fixing could be set by government or on tripartite basis (employers, trade unions and government) or either through collective bargaining at national or regional or sectoral and occupational minimum wage rates.  So under these section the writer tries to make detail us to the basic patterns (forms) of minimum fixing machinery based on the location of what appear to be the most critical decision-making powers. Here Separate treatment is given to machinery where the key decisions are taken by the legislature, the executive branch of government, boards with powers of effective recommendation, and boards with final decision-making authority. However, the boundaries between these patterns (forms) are not always clear because of the existence of complex and changeable arrangements of shared responsibility. So under this section we need to see the nature and character of Institutional arrangement of Ethiopian minimum wage system after consulting each minimum wage fixing machinery pattern (forms).

 

3.4.2.1.  CURRENT ETHIOPIA WAGE FIXING MACHINERY AND ITS CHARACTER

 

  Here before clarifying Ethiopian Minimum wage fixing machinery and its character it is better to see approaches of minimum wage fixing machinery practiced in different parts of the world.  There exist four patterns (forms) of determining minimum wage system which are practiced and countries opt system which fit their status taking different criteria into account.

Acts of the legislature: In some countries, though very few, minimum wage rates have been fixed by means of a legislative process. According to this approach the national minimum wage can only be adjusted upwards or extended to new categories of workers by means of legislative enactments. The best example of this approach is United State and subject of criticism as well as a number of occasions attempts have been made to change the law so as to provide for automatic or more flexible forms of adjustment.

Executive authority decisions: In the interests of greater flexibility the minimum wage legislation in a number of countries empowers the executive authority to fix rates and decide upon coverage. Minimum wages are thus determined by order, regulation or decree of the government or the minister of labour and before finalizing its decision, to consult with tripartite general advisory or consultative bodies that are concerned with a wide range of labour policy issues.

Boards with powers of effective recommendation: According to these approach the government delegate the task of preparation of minimum wage decisions to designated bodies, while themselves retaining ultimate responsibility for the rates fixed. The designated bodies, which go under a variety of appellations such as boards, councils, commissions or committees, enjoy varying degrees of autonomy vis-à-vis the government. For example the boards are generally specialized in the sense that the recommendation of minimum wage rates and ancillary decisions constitute their main function. One of the character of these approach is that usually they are permanent rather than ad hoc.

Boards with final decision-making authority: According to this approach wage boards have been granted the final authority to fix minimum rates and as regards other aspects of minimum wage policy. Under this approach the government's role is restricted to being represented on the board and to making submissions. So the board comprises representation from the Government, workers and employers.

     In case of Ethiopia the new labour proclamation which is entered into force in 5th September, 2019 for the first time provide establishment of minimum wage board which shall comprise representatives of the Government, employees and trade unions together with other stakeholders that will periodically revise minimum wages based on studies which take into account the country’s economic development, labour market and other considerations. This provision of the labour proclamation stipulates establishment of minimum wage board which have final authority to make a decision regarding minimum wage. Accordingly the government role is restricted to being represented on the board and participates in decision process. So Ethiopia follows the fourth approach and it is tripartite in character. In Tanzania the minister establishes a wage board and the wage board is required to make findings regarding remuneration and wages and make a recommendation for the Minister. So Tanzania follows the third approach. In Cambodia also the minimum wage is set by a Prakas (ministerial order) of the Ministry in Charge of Labor, after receiving recommendations from the Labor Advisory Committee. In Vietnam, Government assign MOLISA to take the lead in reckoning and formulating minimum wage in different periods in cooperation with the VGCL, VCCI and VCA and it is the ultimate decision maker. In Kenya a permanent General Wages Advisory Board is responsible for inquiring, on request, into the fixing of a basic minimum wage and the Minister may amend or refer back any minimum wage proposals made by the board. So in all four countries the government has a follow up us to the final recommendation presented by the board.  participation of workers' and employers' representatives in Ethiopian minimum wage board can serve to enhance the legitimacy of the decisions taken and promote democracy as well us promote their interest. Perhaps the direct involvement of representatives of workers and employers in the deliberations of the boards is likely to increase the acceptability of the ultimate decision.  In other way government participation can have also the advantage of contributing to the technical soundness of the decisions by expanding the range of information on which they are based. But even if the minimum wage board of Ethiopia is tripartite in character having a power of giving final decision the writer questions the appropriateness of the approach for Ethiopia.

   Experience of those countries seen under chapter 3 suggests the third approach fits best for Ethiopia because making government in the board as only a member have its own limitation because in the board the employee, employer as well as the government has their own objective need to promote. For example the employers' representatives emphasized the need to prevent pay increases that would substantially increase production costs, while the workers' representatives tried to protect or increase workers' real incomes and to ensure for them their share of the nation's economic growth. The government members for their part accorded priority to economic stabilization objectives. So the government is under obligation to make sure the compatibility of minimum wage set by the board with national economic and social policy and, where necessary, make the required changes.

 

3.5. DRAWBACK AND CHALLENGES ON THE IMPLEMENTATION OF MINIMUM WAGE SYSTEM IN ETHIOPIA

 

The need for legislation and strong institutions with regard to wage protection legislation and mechanisms is highlighted further by drawbacks and challenges for those who make wage claims. Even if the government needs effective minimum wage board but there exist problems which are technical or administrative in nature that may arise from time to time, particularly in the functioning of minimum wage boards.

  The potential benefits of the minimum wage for the economy and society are undeniable, provided some conditions are met. But it doesn’t mean that introducing such system has no drawbacks. Drawbacks are diverse and these drawbacks may be expressed widely seen as having a distortionary impact on the labour market. This can be provided in terms of increasing unemployment because firms increase their productivity due to wage increases, workers may be replaced in the medium or long term through automation. As a result unemployment may increase. In other term setting minimum wage and revising periodically may create inflation and affects the worker.  

  Regarding challenges since the minimum wage board is in an inception stage in Ethiopia the Minimum wage may face the following challenge in its effective operation. Frist regarding selection of board members acceptability of their decisions will depend no their proper representation and as having appropriate qualifications. Especially in case of representative of workers it is clear that in Ethiopia workers have less bargaining power when we compare with employers and government.  The workers may challenges the proper representation of their interest in the board. For example both in Kenya and Tanzania the legislation simply
requires that, before appointments are made to wages councils or boards, the Minister shall consult with any organizations appearing to him adequately to represent the employers and the workers concerned. So in Ethiopia to pass such challenge Regulation of the Council of Ministers which is expected near future to be enacted which determine the powers and responsibilities of a Wage Board is required to have a provision to tackle such challenge as well as there exist many ILO minimum wage related conventions which provide principles concerned with the selection of board members. Second, there may exist delays in decision-making. the reason of delay may vary. such as lack of available, updated and necessary information for studies, non-attendance of members at meetings or the difficulty of scheduling meetings at a time convenient to all board members because most of whom may have other responsibilities and some other legal procedural challenges may occour.so in Ethiopia setting and revising minimum wage decision-making takes longer than the prescribed limits and even for long years. The minimum wage laws of many countries contain provisions specifically designed to eliminate commonly encountered causes of delay. So in Ethiopia also the new regulation is expected to do so. Third, regarding criteria’s that has been taken by the board for fixing the minimum wage may result controversy.  This is because Ethiopian new labour proclamation provides in time of fixing the minimum wage the board should take into account the country’s economic development, labour market and other considerations.What is other consideration is not provided in the labour code. So we can say is that the needs of workers and their families or the capacity of firms to pay or inflation rate of the country and etc. In other way there may be an instance under which these criteria, might be contradictory and for which criteria priorities should be given. Finally Lack of clear enforcement mechanism for non-compliance of  minimum wage provision is another challenge for Ethiopia. For example in Tanzania regarding enforcement of minimum wage there is a clear provision that provides that any worker who has been paid wages below the prescribed minimum wage may apply to the District Court or Resident’s Magistrate’s Court for the recovery of the amount by which the worker was underpaid.

 

4. CONCLUSION AND RECOMMENDATION

 

   The Article examined the Minimum Wage System in Ethiopia by making Comparative Analysis with other Nations, for this reason the general concept of minimum wage system starting from its brief overview is explored in detail. Finally the Ethiopian minimum wage system is comparatively discussed under separate part.

  A minimum wage is the lowest wage that employers may legally pay to workers.   In Africa almost all countries in Africa have minimum wage fixing programmes, the notable exceptions being Ethiopia, Nigeria and Somalia as well as currently, out of 187-member states of ILO only 8% of them have no minimum wage at all. Having minimum wage has many purposes. The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a just and equitable share of the fruits of progress to all, and a minimum living wage to all who are employed and in need of such protection.  Now days the arguments in favour of minimum wages have got acceptance in Ethiopia as an important intervention tool for protecting workers and a minimum wage board who has a power to fix and revise minimum wage periodically is established by new labour proclamation.

  Regarding international legal instruments, the main document that regulates minimum wage is the ILO constitution. Among these Minimum Wage Fixing Machinery Convention, 1928(N0.26), Protection of wage convention,1949(No.95), Minimum Wage Fixing Machinery (Agriculture) Convention, 1951 (No. 99), and  Minimum Wage Fixing Convention, 1970 (No. 131) are prominent convention in ILO. But Ethiopia is not signatory to all these conventions until now.

   The potential benefits of the minimum wage for the economy and society are undeniable, provided some conditions are met. But it doesn’t mean that introducing such system has no drawbacks and challenge. Regarding challenges since the minimum wage board is in an inception stage in Ethiopia the Minimum wage may face the following challenge in its effective operation. 1st  regarding selection of board members acceptability of their decisions will depend no their proper representation and as having appropriate qualifications. Especially in case of representative of workers it is clear that in Ethiopia workers have less bargaining power when we compare with employers and government.so such thing may be a challenge. 2nd there may exist delays in decision-making. the reason of delay may vary. such as lack of available, updated and necessary information for studies, non-attendance of members at meetings or the difficulty of scheduling meetings at a time convenient to all board members because most of whom may have other responsibilities and some other legal procedural challenges  may occur. 3rd regarding criteria’s that has been taken by the board for fixing the minimum wage may result controversy because of lack of clear criteria settled under the proclamation. Finally Lack of clear enforcement mechanism for non-compliance of minimum wage provision is another challenge for Ethiopia.

Finally the writer of these Article forwards the following recommendations with regard to the problems related to the Ethiopia minimum wage system concerning the legal framework for regulating minimum wage, its institutional arrangement for fixing minimum wage as well as regarding challenges that may encounter during implementation and other problems found by study.  Frist, It is clear that Ethiopia is a member of ILO but until now she is not a signatory to those important conventions which are directly related to minimum wage. Those minimum wage related convention such as Wage Fixing Machinery Convention, 1928(N0.26), Protection of wage convention, 1949(No.95), Minimum Wage Fixing Machinery (Agriculture) Convention, 1951 (No. 99) and Minimum Wage Fixing Convention, 1970 (No. 131) provides a good framework for best practice. Ratifying these Conventions is a prerequisite for best practice and implies having certain obligations. So Ethiopian government is required to ratify these conventions.   Second, Minimum wages are known to have profound impact not only on the labour market but also the whole economy. Ethiopia needs a separate National minimum wage policy which is a base for legislation and should base themselves on systematic monitoring and analysis for their success. So the writer recommends based on scientific study Ethiopian government is required to draft and apply sound national minimum wage policy.   Third, The new Ethiopian labour proclamation No.1156/2019 those provision which are dedicated for wage will be amended in a manner including detail provision about minimum wage and arrangement of minimum wage board. This is because the new labour proclamation like employment act of those countries seen under chapter three clearly provide about definition of minimum wage, components of minimum wage and other relevant concepts and indicate the measures taken or envisaged in order to ensure that the labour legislation provides for appropriate sanctions against the infringement of minimum wages as well as like establishing  National Inspection Directorate  which have a labour inspectors for  adequate monitoring of compliance  of employers with minimum wage legislation so as to effectively prevent such infringements.  Fourth, The government need to give attention to ensure genuine and effective consultations with the most representative employers’ and workers’ organizations in all matters related to minimum wage fixing as well as provide more detailed information and need to give  reliable evidence for the minimum wage board. Finally, Until now a regulation that provides us to right and responsibility of minimum wage board is not issued. So near future when the regulation is enacted it is required to provide detail responsibility us to provide a solution for the challenges raised in the comparative analysis.

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The Minimum Wage System in Ethiopia: Comparative Analysis with other Nations