Compromising on salary adjustments in Lebanon
Social demands are surfacing again in Lebanon due to the growing mismatch between average income and average consumption for the regular family. It is not sufficient to raise salaries, and it is equally important over time to provide affordable and quality medical care and social benefits for all citizens. It will take a long time for those benefits to be provided at a satisfactory level.
Moreover, the financing may not be available now. Therefore a quick salary adjustment is necessary to cover parts of the loss in purchasing power and to preserve social stability and avoid a general strike. The government should not impose a solution on the eve of the strike as it did with the drivers, as such solutions are bound to be discriminatory and badly designed.
If salaries should be adjusted, what are then the acceptable rates of increase favorable to both parties currently negotiating under the auspices of the Labor Ministry? Obviously, the public expects the government to be an efficient and honest mediator, inspiring confidence in both parties and the public at large. I propose the following scheme by tranches where the first LL500,000 is subjected to a 50 percent increase, the second LL500,000 to a 40 percent, the third to 30 percent, the fourth at 20 percent and the remaining at 10 percent on condition that the monthly raise does not surpass LL1 million. For example, a salary of LL2 million today will become LL2.7 million. Government employees may have to wait for the new budget to come out in the next few weeks before a decision can be taken. The private sector can apply it immediately.
I am fully aware that this proposal does not fulfill the full aspirations of the labor movement but falls within the means of the business sector. It’s a compromise which may not completely satisfy both parties, but it’s a right response to a justified request for a salary adjustment.
The increase should be applied as of Oct. 1, 2011, as full retroactivity in this type of calculation is not recommended and could jeopardize the health of many small firms in rural areas. The main question that could be addressed is the impact on the economy and especially on inflation. Economic studies show that when an economy is operating at full employment, an increase in salary leads to an increase in the costs of production and therefore to an increase in prices. On the other hand, empirical studies show that when an economy is operating below full employment which is the case of Lebanon, there is no indication whatsoever of a relationship between salary increases and prices. The studies show that under the latter, a salary increase pushes businesses to organize themselves better, that is, to increase their productivity. Therefore a moderate salary increase under conditions of underemployment will improve the social climate and help businesses adjust their administrative and technical operations to the benefit of the economy and its growth.
What should be done to avoid a similar clash in the future? Salaries should be adjusted annually at a rate equivalent to half the overall inflation index as measured by the official Directorate for Statistics. Businesses can easily absorb annual increases but hate to have to do large adjustment in so many years. Moreover, the labor policy of the government should go beyond salary adjustments to worry about improving the productivity of labor and firms negatively affected by events in Lebanon and the region. This productivity can be helped by properly investing in education, training and development for management and workers.
Louis Hobeika is a professor of economics and finance at Notre Dame University