What follows is my opening commentary for the town hall meeting on Bermuda’s living/minimum wage at St George’s Cricket Club last week.

The last few decades have been tough for labour. Shifting macroeconomic forces have tilted the playing field in the economy towards capital and created a much more difficult environment for real wage growth and opportunities.

According to recent US Federal Reserve Data, corporate pre-tax profits have grown from 5 per cent to about 9 per cent of US GDP since the late 1990s while wages have shrunk from 46 per cent to approximately 43 per cent. There are many reasons for this shift and it would be impossible to pin this on one or two major aspects but here are a few to consider:

• Low interest rates and cheap capital have enabled zombie companies to perpetuate and frustrate productivity growth and the efficient allocation of capital. Lower productivity limits wage growth.

• The scalability and automation of jobs through technology has created job destruction and shifted the nature of work for many industries which has left those affected with little to no bargaining power when it comes to jobs. The mix of jobs is shifting, and the speed of this change is accelerating.

• Partially due to regulation and network effects, a winner-takes-all market has developed in some industries that has fostered monopolies or oligopolies. These groups can stifle competition and control pricing to a large degree. In some cases, this lack of competition prevents a more free-market based job market full of options for workers within these industries.

This does not look like it will improve over the medium term either. The recent OECD report on the future of work highlights the following:

• 14 per cent of jobs could disappear from automation in next 15 to 20 years.

• 32 per cent of jobs are likely to change radically due to automation.

• One in seven workers are self-employed, one in nine on temporary contracts.

• Six out of ten workers lack basic IT skills.

• Union membership has fallen by almost half in the past three decades.

All the aforementioned has exasperated inequality and has created levels not seen since 1929. This inequality has frustrated many workers and is beginning to create social tensions throughout the world. It has even reached the point where many question capitalism itself.

Why do I mention these aspects on a day where we are to discuss a living wage or minimum wage in Bermuda? Because these concepts, I believe, are very real issues and risks for Bermuda and may, in fact, be the most important things to consider. You cannot, of course, benefit from a minimum wage if there is no wage to be had.

Let me end with some discussion on the economic impact of a minimum wage. Recently a very timely and relevant survey was conducted by the software group Harris. It was the 2019 Hospitality and Food Service Wage Inflation Survey.

Many states in the US have embarked on various forms of minimum wage laws. Harris surveyed 173 restaurants and over 112,000 employees across the US between February 28 and March 15 about the impact of raising the minimum wage.

The respondents represent more than 4,000 restaurant locations ranging from fine dining to fast food. To combat increased labour cost the report found:

• Almost two-thirds (64 per cent) reduced employee hours.

• 27 per cent eliminated ancillary positions.

• 26 per cent deployed new technology.

• Almost half (46 per cent) reworked food and beverage offerings to reduce costs.

• 71 per cent of operators raised menu prices.

• 43 per cent eliminated jobs.

• 9 per cent closed locations.

These are some of the potential outcomes of minimum wage laws. I am not saying all of these will happen for sure in Bermuda, but we need to be cognizant of potential ramifications.

If the minimum wage is set too high, it will force businesses to close and cost jobs. It could also lead to much higher costs which could simply counteract any increase in wages.

It’s also worth noting that these are observable results highlighted by the survey. But there is more. The French economist Federic Bastiat is famous for the concept of “that which we see and that which we do not see” when it comes to economics. He talks to how many will miss the unintended consequences brought about by economic policies because they are not directly observable.

This is why it is critically important that we get this right. It is vital that we do not create a system that curtails lower skill or youth employment and ends up creating a country where we have no idea how many jobs were never created in the first place because of policies pursued.

Sources

OECD (2019), OECD Employment Outlook 2019: The Future of Work, OECD Publishing, Paris

https://doi.org/10.1787/9ee)) 155-en

Harris’s 2019 Hospitality and Food Service Wage Inflation Survey https://content.harri.com/Research/Hospitality-Wage-Inflation-Survey-2019?utm_source=PR & utm_medium=Press-Release & utm_campaign=Wage-Inflation-Survey & utm_term=4-2019

Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the chief financial officer of Anchor Investment Management Ltd and can be contacted at nkowalski@anchor.bm

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