MODERATE MINIMUM WAGE INCREASE, RECORD LOW INFLATION

UNCLAS BOGOTA 000139 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ELAB ECON PGOV CO SUBJECT: MODERATE MINIMUM WAGE INCREASE, RECORD LOW INFLATION UNDERSCORE GOC FISCAL DISCIPLINE REF: 09 BOGOTA 3576; 09 BOGOTA 1829 ¶1. (U) SUMMARY. The Colombian government decreed a 3.6 percent increase in the federal minimum wage for 2010. The increase was greater than the two percent inflation for 2009, meaning it should provide some stimulus to an economy just beginning to pull out of recession. Annual minimum wage hikes is one area where Colombia has shown fiscal restraint that has kept inflation below 10 percent since 1999, after three decades of double digit price increases. END SUMMARY. TRIPARTITE PROCESS MORE CIVIL, BUT STILL INEFFECTIVE -------------- -------------- ¶2. (U) Colombian law requires an annual meeting of a tripartite "Commission of Salary and Labor Policies" - made up of organized labor, business, and government representatives - to negotiate the minimum wage, among other topics. At the end of 2009, as has happened for the last several years, the Commission failed to reach agreement on the minimum wage increase, with unions pushing for 8 percent; business groups 3.2 percent; and the government 3 percent. ¶3. (U) Once it became apparent in late December that the Commission would not come to an agreement, labor union confederations and business groups issued a surprisingly positive joint statement, praising the cooperative approach of the other side, despite an inability to reach accord. The two sides also noted areas of agreement, such as the benefits of low inflation, the ill effects of the informal sector, the need to reduce unemployment (12 percent average for 2009),and the destructive results of Venezuelan trade restrictions. This declaration came in sharp contrast to the 2008 dynamic, when union leaders threatened to sue the government for increasing the minimum wage by less than the poor population's market basket inflation. REAL INCREASE GOOD FOR ECONOMIC RECOVERY, ELECTIONS -------------- -------------- ¶4. (SBU) As a result of the Commission's lack of agreement, the GOC decreed on December 30, 2009 a monthly minimum wage for 2010 of 515,000 pesos (currently about $260),a 3.6 percent increase. Given two percent inflation in 2009, the GOC expects the 1.6 percent real minimum wage increase to be expansionary for an economy just beginning to exit recession. At the same time, the increase is not expected to cause inflationary pressures, given estimates that current output is 4.5 percent below its potential. It is also worth noting that of the eight minimum wage hikes during Alvaro Uribe's presidency, election years have seen the highest (2006 - 2.0 percent) and third highest (2010 - 1.6 percent) real increases. ¶5. (SBU) Only about 720,000 Colombians receive the minimum wage, out of 8 million employed in the formal sector. Nonetheless, many receive salaries indexed to the minimum and economists argue that the minimum wage has a "lighthouse effect" that can provide signals to employers where to set wages, even in the informal sector. As such, the minimum wage is an important salary benchmark. Colombia's minimum wage is 60 percent of the country's average wage, compared to 30 percent in Brazil, Chile, and Mexico, according to labor economist Stefano Farne. As such, economists point to Colombia's relatively high minimum wage and payroll taxes ('parafiscales'),which add a 60 percent premium to employer salary costs, as key reasons for Colombia's high structural unemployment and rampant informal economy (Ref B). LOW INFLATION, BUDGET CUT BURNISH GOC FISCAL CREDIBILITY -------------- -------------- ¶6. (SBU) Colombia's consumer price index (CPI) increased by 2.0 percent in 2009, well below the Central Bank's target of 4.5 - 5.5 percent. It marked the lowest annual price increase in 55 years of inflation recordkeeping. Food prices actually decreased by 0.3 percent for the year. Finance Minister Oscar Ivan Zuluaga told us he hoped a silver lining to the recession would be a strong dampening of inflation expectations in Colombia that could keep future inflation in check. Since Colombia's 1999 recession, annual CPI increases have averaged 6.3 percent, following three continuous decades of double-digit inflation. The inflation target for 2010 is 2 - 4 percent. ¶7. (U) In mid-January, the GOC announced a 5.9 trillion peso ($3 billion) cut in expenditures of the 2010 budget (Ref A) in order to maintain "fiscal sustainability." The reduction, which will bring the budget deficit down to 3.7 percent of GDP, includes: 2.2 trillion pesos ($1.1 billion) in unspecified operational expenses; 2 trillion pesos ($1 billion) in public investment; and 1.7 trillion pesos ($900 million) in an automatic adjustment from more favorable than expected inflation and exchange rates. In public remarks, President Uribe asserted that fiscal cuts in an election year were the responsible thing to do and would help bolster investor confidence, one of the three pillars of his democratic security policy. BROWNFIELD