Minimum wage levels

Debates over the appropriate levels of minimum wage that should prevail in the PNG have been part and parcel of every MWB sitting. Have the levels of minimum wage been high in PNG? Reflecting the views of liberal economists (Reference Chand, Yala and MayChand and Yala, 2009; Reference Garnaut and BaxterGarnaut and Baxter, 1984; Reference McGavinMcGavin, 2001), the climax of the minimum wage debates was the 1992 MWB determination. This was notable for several reasons. First, the Board radically deregulated the wage system to accommodate capacity to pay (profitability) and productivity of firms. In its own words, the Board ‘observed that deregulation of wages effectively means that wage rates are determined by market forces’ (MWB, 1992: 68). Wage indexation was abandoned in favour of a productivity-based system that was thought to bring flexibility to the labour market. This was despite the fact that the MWB still set the national wage minima that took the form of a unified urban and rural minimum wage. The MWB believed that any pay increases above the minimum wage for labourers and actual rates for all other classifications were to be negotiated between employers and employees or their representatives, based on productivity and capacity to pay. The Board accepted the argument that the industrial relations system had the capacity to accommodate the needs of workers and employers in regard to settlement of wage issues either at the workplace levels or nationally.

Second, the regulated rural–urban wage differential was completely removed and a NMW rate of K22.96 per week introduced. The 1992 determination also established a youth wage classification, set at 75% of the adult minimum. However, for urban workers, the NMW constituted a K38.64 reduction from a previous level of K61.60 per week for unskilled workers. It applied to all the workers irrespective of their location. The other classification was a National Youth Wage, set at about 75% of the new NMW and applying to all new entrants to employment aged between 16 and 21. Third, the previous system of regulating minimum rates across an array of skill categories was abolished in order for the new NMW to be applied as a safety net for all workers. Above everything else, the main aim of the two classifications (youth and adult) was to ‘encourage and induce many more rural sector employers to increase their youth employment level, particularly at this time of acute youth unemployment and unprecedented lower primary commodity prices’ (Reference ImbunImbun, 2008: 73).

Did PNG actually have a high level of minimum wage for a developing country in 1992? In fact, the opposite was the case, as actual wage rates were much lower than the government and its advisors assumed. This was because the continued perception of PNG as a ‘high wage’ country was arguably a ‘hangover’ of the ‘wage explosion’ period (1972–1975) of pre-independence PNG, when urban minimum wages rose by 120%, while rural minimum wages rose by 41% in nominal terms (Reference Colclough and DanielColclough and Daniel, 1982: 43). However, the changes in minimum wage rates after the 1992 deregulation had profound effects for workers. The deregulation was implemented when the Kina was relatively on par with the US dollar, but it quickly lost its real value.

Table 1 shows urban and rural minimum wage rates from 1972 to 2008 in nominal and real terms. The wage kept its real value within plus or minus 5% across the 1980s, but then fell sharply in real terms after the removal of indexation in 1992. The PNGTUC, in a well-researched submission, advocated in the 2008 MWB hearings that the wage needed to be K85 per week in order to restore the purchasing power provided in the 1980s before the cessation of indexation (PNGTUC, 2008: 22).

Table 1. Nominal and real minimum wage levels in urban and rural sectors for labourers from 1972 to 2008.

Source: Reference ImbunImbun (2008: 75).

Constant price series derived by converting to 2008 prices using the linked urban consumer price index.

The economic hardships faced by minimum wage earners in PNG have in recent years prompted politicians, urban administrators and trade union leaders to step in and tender their support. In 2011, The Prime Minister, Peter O’Neill, directed the DLE to review the 2008 wage determination, stating ‘the current rate is still too low and insult to our people’ (Post Courier, 18 August 2011: 3). The DLE was given 100 days by the National Executive Council (NEC, 2011) to come up with a new policy aimed at increasing the prevailing rate of K2.29 per hour (or K91.60 per week) to K3.50 (p. 12). It seems the undertaking was not heeded as the Lae Mayor in 2013 took the DLE to task for ‘being lazy and not doing their job’ in ensuring that the 2008 determination was implemented in workplaces, particularly in his city. However, lack of capacity in the DLE meant that workplaces were rarely checked for compliance issues regarding not only NMW policies but also on other areas such as occupational health and safety and training and localisation. The Mayor alleged that the going rates were even lower and in some workplaces such as canneries and retailing, workers were being paid 70% (K1.60) of the minimum wage (Post Courier, 22 January, 2013a: 2).

The PNGTUC consistently advocated for a ‘living wage’ in the MWB sittings; it also maintained the same in the media. In a recent trip to Madang, one of the major towns in PNG with a concentration of many minimum wage workers engaged in the fish canning industry, John Paska, the PNGTUC general secretary, ‘sounded a stern warning to companies taking advantage of their workforce to clean up their act’ or they were to face the full force of the law (Post Courier, 8 May, 2013b: 4). In fact, many companies in the country deliberately underpay their workers. In Madang, for example, the going rates of canners and processers are K1.30 and K1.40 per hour, respectively, less than the prescribed K2.29. The canning companies issue threats of dismissals and offer the excuse of lack of capacity to pay (ibid.). This anecdotal evidence points to the low level of minimum wages, and fact that the going rates for minimum wage jobs are no way near the prevailing prescribed wage rates.

Minimum wage and economic growth

The private sector and government often claim in MWB proceedings that the minimum wage rate has the capacity to influence economic growth. This raises the question, has the prevailing level of minimum wages actually hindered economic growth? The argument has been that PNG has experienced low economic growth over the past three decades, and that this is attributable mainly to high wage levels (see, e.g., Reference Chand, Yala and MayChand and Yala, 2009). PNG’s economic performance in terms of GDP and per capita for most of 1990s and early 2000s has been negative and there was an urgency on the part of the government to address rising poverty levels in the country (WB, 2004: 13). Commentators and the government have frequently made reference to the disadvantage of an indexed wage system, with minimum urban wages, in particular, seen as much higher than productivity has warranted (Reference Duncan and LawsonDuncan and Lawson, 1997: 25; Reference ImbunImbun, 2008; PNG Government, 2000: 9–15, 2008 and various years).

On the other hand, according to the PNGTUC (2008: 11), PNG recorded very low rates of private fixed investment relative to comparable countries, in a ratio of less than 20% of gross domestic product (GDP). The PNGTUC also claimed that over the period from 1980 to 1992, wage and profit shares diverged. In 1980, each was 40% of GDP. But by 1992, the profit share had risen to 71% of GDP, while the wage share had fallen to 15%. The same line of argument was used in the 2013 MWB sitting, where the PNGTUC argued that employer groups were responsible for reducing GDP. It estimated that K8 billion, which could have been spent on wages, or reinvested onshore, had been ‘siphoned out of the country thereby stifling domestic demand not to mention instilling needless suffering on workers and their families’ ( Post Courier, 2014: 1). Given that a prevailing 40% of the PNG population are stated to be living below the poverty level of USD1 per day (UNDP, 2014), the level of profit flight claimed by the PNGTUC is not altogether convincing.

The wages debate in PNG appears to be increasingly one-sided, concentrating on costs, profit and production – the cost aspects of wages. The income aspect of wages, which determines the welfare of the workforce and productivity capacity, has been largely ignored (Reference ImbunImbun, 2008, 2009). Nor have the present wage arrangements fulfilled the obligations of ensuring that labour input is adequately rewarded and that basic needs (food, shelter and health) of the workforce met. At least, that is the perception of the PNG National Research Institute, the Government’s think tank. Reference OdhunoOdhuno (2014), a researcher of the institute, has commented that ‘minimum wage earners are missing out on the country’s resource boom’ of which little has trickled down. He has acknowledged PNG as being one of the fastest growing economies in the Pacific region, but the country has failed miserably to pass on the proceeds of the growth to the wider population. Odhuno has blamed the delay in handing down the 2013 minimum wage determination as excruciating for the suffering workers. One president of a chamber of commerce remarked that ‘there were some bad ones (employers) who were paying below the minimum wages’, adding that they had ‘absolutely no reason to do so’ (Post Courier, 8 May 2013b: 8).

Minimum wage and employment creation

The notion of the market-clearing wage is a neo-liberal mantra, based on the claim that unemployment is generated by wage levels that are too high. As well as their claimed impact on growth, have minimum wages also constrained employment creation in PNG? In successive MWB sittings, entrenched views have also blamed the dire unemployment problem in PNG upon high wage levels. However, the proponents of this claim have had difficulties in identifying employment trends as well as the extent of unemployment in the country, owing to lack of reliable labour market information. The 2008 MWB relied on a preliminary 2000 census report that identified unemployment nationally to be 4% of the formal labour force. The youth unemployment rate in major urban centres such as Port Moresby and Lae was estimated at 5.3%. Unemployment rates among young men and women are also said to be about three times higher than for the general population (MWB, 2008: 28). Of the estimated 80,000 school leavers each year, fewer than 10,000 enter the formal labour market, leaving the rest to either engage in the surging informal sector or be absorbed into subsistence lives (ILO, 2008: 12). The ‘youth bulge’ is one of the most profound development challenges, having direct implications for the serious escalation of law and order problems. Politicians and decision makers, including MWBs, have contended that wage cuts were the remedy to increase the absorptive capacity of the labour market.

Given the singling out of high labour unit wage costs as an obstacle to employment creation (Reference Chand, Yala and MayChand and Yala, 2009; New Britain Oil Palm, 2008; PNG Employers Federation, 2008), the role of effective demand in job creation has been neglected in debates in PNG. Yet, if there is one sector of the PNG economy which can play a significant role in assisting in the generation of employment, it is the extractive sector. This is critically important as in recent years the country has experienced unprecedented economic growth, averaging 6%–8%, fuelled by a surging mining and hydrocarbon investment. However, income earned from this sector, or other sectors such as construction, fisheries, forestry, including the resilient agriculture sector, has never made any major impact in the creation and expansion of employment opportunities (Reference Filer, Andrew, Carr and BetchermanFiler et al., 2014). Paradoxically, the failure to take advantage of this largely enclave industry in maximising its impact across the larger economy is explained by the PNG Government’s view of it as a ‘sunset industry’ which is therefore not judged to be able to contribute to sustainable development (Reference Filer, Imbun and MayFiler and Imbun, 2009: 77). The failure to create domestic demand stimulus as an added source of economic growth and employment creation is an obvious deficiency in the government’s labour market policies and general development endeavours. For these reasons, it is very difficult to argue convincingly that minimum wage levels have had a dampening effect on employment rates.

Minimum wage and international competitiveness

High levels of minimum wage have also been blamed by industry and government for adversely affecting international competiveness. Is the argument plausible? In every MWB sitting, one of the major objectives has been to determine a wage that would attract foreign investors. The perception among members, particularly the government and employers, has been that because PNG is an open, export-oriented economy, a drastically reduced minimum wage would make the country extremely competitive for its manufactured goods. The government has particularly envied the unprecedented economic growth and consequential rise in living standards of its neighbouring Asian Tiger economies in recent decades (Reference ImbunImbun, 2008). It apparently believed that achieving such economic feats was within reach on the back of the country’s strong natural resources. However, what has been potentially obstructing investment of any kind is not the rate of minimum wages, but the continuous increase of non-wage costs which constitute a large proportion of total costs of business (Reference BakerBaker, 2008; Reference ManningManning, 1997; PNG Business Advantage, 2013). Some sectors, particularly agriculture and retail, have been particularly susceptible to non-wage costs. The earnings of coffee plantations in the PNG highlands have dropped in the previous two decades as a result of the need to hire security and infrastructure developments that were hardly issues in the 1970s and 1980s (Reference ImbunImbun, 2014).

International comparisons linking wages and economic development rates are very difficult to make, because of the lack of recent reliable comparative data. It is thus difficult to compare PNG with similar developing countries to establish the place of wages in growth and development indicators. Even the going rates for jobs earning minimum wages are hardly public knowledge apart from the prescribed rates from the MWB. But the ILO (2013: 2) has pointed out that poor working conditions and low quality jobs are pervasive throughout the region. In this mix, recent wage trends are a cause for concern. According to this peak international organisation, between 2000 and 2011, average manufacturing (and agriculture) wages in China, India and the Philippines were well under USD2 per hour, compared to USD12.68 in Singapore and USD18.32 in Japan. This suggests that it is hardly a viable strategy for a small country like PNG to seek to compete in the global market place on the basis of low wages, particularly when it is rich in non-labour resources. But the benefits of such resources are not being distributed. For PNG, the LNG boom spurred average economic growth of 9% in 2012, but the impact was only superficially felt among lower wage earners.

The debate over internationally competitive wages continues. Earlier Reference CarrollCarroll (1993: 25), in one of the few studies on PNG minimum wages, acknowledged that levels of both urban and rural wages were high in comparison to countries with similar levels of development to PNG. In Carroll’s analysis (cited in Reference ImbunImbun, 2008: 99), agricultural wages in PNG were much higher than in those countries that were also plantation economies. Against countries with which PNG did not compete in agricultural products, such as South Korea and Singapore, the minimum wage average for PNG rural wages appeared to be sound. Even though wages in those countries were higher so was their productivity. Reference CarrollCarroll (1993) noted that successive MWBs were convinced that in PNG, high urban and rural wages relative to other countries were discouraging plantation and manufacturing production for export. Wages were also seen as reducing possibilities for import substitution industries, prompting a search for techniques to substitute capital for labour. This argument has survived successive MWB determinations, despite the claim that the allegedly high rates set by the centralised system have contributed to poor international competitiveness, internal equity problems and lack of congruence with prevailing productivity levels (Reference CarrollCarroll, 1993; Reference ImbunImbun, 2008, 2009). The comparative plantation wage argument strongly influenced the de facto deregulation of the wage system in 1992. Despite lack of empirical evidence in employer submissions to subsequent MWBs, their assertions continue to have currency, that PNG is a high wage country.

Nevertheless, some investment occurred in the areas of the economy involving minimum wages, after the drastic wage reductions and labour market deregulation of 1992. Canning factories in particular opened up in Lae and Madang in the mid-1990s and 2000s, but this development was not attributed to the decision of the MWB. It appears that the high market demand for tinned protein additive in PNG influenced the decision to establish these factories. They may be taking advantage of the new minimum wage during the past years. Most of the workers were females, because this type of work is not considered socially acceptable for men to undertake in PNG, at least traditionally. However, there is no evidence to suggest that firms operating in the country have switched from capital intensive to labour intensive operations to take advantage of the reduced minimum wages (Reference ImbunImbun, 2008, 2009). Without related infrastructural support policies, the goal of having a robust manufacturing sector in the economy cannot be achieved.

Minimum wage and capacity to pay

Is a ‘capacity to pay’ wage system viable in PNG? The MWB, in the course of its history, has endeavoured to introduce a wage system that was based on negotiation between employer and employee. At least, that has been the undercurrent in the private sector submissions to the MWB determinations. But capacity to pay based on productivity arguments has become less successful in the face of strong support for social equity by many Board members. Actually, capacity to pay based on productivity has also implied financial profitability for commercial enterprises (Reference ImbunImbun, 2008). However, the breakthrough for an approach based on productivity and profitability came in the 1992 MWB and subsequent determinations that attempted to introduce capacity to pay-based wage system to PNG workplaces and organisations – an approach that implied a degree of decentralised wage fixing, and provided encouragement for local bargaining.

The 2000 and 2008 MWBs encouraged not only flexibility but allowed for greater utilisation of the country’s dormant industrial relations machinery in order to establish, and provide justice to, cases arising out of the new wage policy. Those who welcome this development argue that workers have too long become so used to receiving CPI-enhanced minimum wage levels determined by the Board that they have not really put any serious thoughts into negotiating with their employers at the workplace level (Imbun, 2009). Now that the Board has allowed for more collective bargaining, many employers have seen that path as the right way to proceed in determining wages for workers. None had more bearing than calls from various employers, especially in the plantation sector (PNG Growers Association, 1992, 2008). The employers in this sector, many at a time, have argued that out of policy compliance they have been paying higher wages to the bulk of the country’s minimum wage earners than productivity and financial profitability warranted. Therefore, the shifting of some wage deliberating powers to workplaces is seen as promising a mutual outcome for the parties.

But such efforts have occurred in theory only. In practice, a number of fundamental issues have hindered the implementation of workplace-level bargaining. First, although there has never been a problem in terms of putting a figure on the appropriate wage, the difficulty has been availability of reliable financial and productivity information in the workplaces on which workers and trade unions can base their negotiations. Reference Imbun and NganganImbun and Ngangan (2000) found that in award negotiations, companies were reluctant to disclose productivity and wage data to trade unions. Labour market deregulation in the Pacific Island Countries in the last decade has generally led to a loss of workers’ rights. Particularly in PNG, many workplaces have experienced enhancement and consolidation of management rights through the implementation of stringent rules to discourage worker organisations (Reference Kanaparo and ImbunKanaparo and Imbun, 2010).

Second, despite passionate support at a policy level for a deregulated wage system based on capacity to pay and profitability, ironically employers have been reluctant to embrace the concept in their workplaces. This has been the case particularly in sectors of the economy which provide employment to most minimum wage earners. For example, in 2010 the DLIR (Department of Labour and Industrial Relations, the re-named DLE) was forced to step in to regulate the conduct of the Philippine-owned tuna fishing and canning company RD Tuna in Madang. The government’s intervention resulted in the reinstatement of some 500 factory workers, and the backdated payment of new 2008 minimum wages that the company had been withholding. After failing in its bid for reclassification as an agricultural company, the company was seeking to avoid back-payment of owed wage increases by hiring a new workforce, albeit on the new minimum rate (Pacific Islands Report, 2010: 3). In another case, the International Transport Federation reported that one of its affiliates, the PNG Maritime and Transport Workers’ Union (MTWU), reported that 357 employees of Frabelle (another Philippine fishing company) were allegedly harassed and some were dismissed when PNGMTWU membership authority forms were submitted to the company (International Transport Workers Federation Global (itfglobal), 2010). In the country’s massive logging sector, the United States Department of State (2011: 19) reported that ‘antiunion activities were widespread [in a sector] which was known for extremely low wages and poor working conditions, including debt bondage and cramped and unhygienic accommodation of workers’. This attitude by management was typical of many workplaces where profit margins are often high and workers’ wages are just a fraction of operational costs (PNGTUC, 2000 and 2008). Unfortunately, in this case and other similar antiunion cases, employers often get away with such corrupt practices. This is because the DLIR enforces labour laws selectively, often blaming lack of resources and personnel for failure to investigate issues thoroughly.

Finally, even if a wage system based on capacity to pay was embraced at workplace level, there is no reliable evidence available to demonstrate that productivity is the main determining influence on profit levels that would be easily understood by management and workers. This is despite the very strong need for urgent efforts to be made to improve the levels of labour productivity and performance in PNG. Commentators (see, for example, ADB, 2010) who have argued for improvement of labour productivity in PNG have also stated that ‘the need for a downward adjustment of real wages would be correspondingly less’ (WB, 204: 39). But the question is, how could minimum wage workers be aware of an increase in the productivity or profitability of their workplaces, if information is strictly guarded by management? Another issue is the measurement of productivity itself. Productivity levels are unknown in PNG. This is a symptom of a wider problem of acute absence of authoritative labour market and other statistical information in the country. Further, declaration of profits is rarely done in industries (such as fishing and agriculture) where the bulk of the workforce are minimum wage earners. There is no way of knowing the financial status of these companies, despite public knowledge of world market prices for crops such as coffee, cocoa and oil palm, which are often publicised in the media (Reference ImbunImbun, 2014).

The trend of further reducing the minimum wage which had already reduced its relative purchasing power creates the risk of further productivity declines. Manifestations include absenteeism and theft that are rampant in workplaces, particularly in the retailing and plantation sectors (Imbun, 2009; Reference ManningManning, 1997). Such outcomes appear not to have been entertained in wage deliberations in favour of reducing the minimum wage.