Kenya: Does the 12% Minimum Wage Have a Discernible Effect on Employment?

Nairobi — Despite company protests, President Uhuru Kenyatta authorized a 12 percent increase in minimum monthly salaries on 1st May 2022.

The directive mostly helps low-wage workers including, but not limited to cashiers, drivers, guards, cleaners, salespeople, and property managers, a move that has sparked intense reaction from Kenyan employers.

Federation of Kenya Employers Executive Director Jacqueline Mugo stated that; “Employment is a big challenge for this country and we need to consistently strike a balance between raising pay and hiring more workers. The directive will push up fixed expenses for businesses and lengthen the freeze on new employment which started at the height of COVID 19 shocks in 2020. Labor is a fixed cost and so this wage rise is a monthly hit on the payroll; but we will do what we can to see what adjustments to make to comply with the Head of State’s directive.”

With this in mind, some businesses may find it alluring to adjust by declaring redundancy to help reduce employee costs; others may reduce employment benefits like medical schemes and others may boost prices in response to the minimum wage.

Some employers’ earnings in terms of profitability may decline, yet all these adjustments may prove to be quite unnecessary in the long run.

According to leading economists, in a completely competitive market, increases in the minimum wage have no noticeable effect on employment; because of the relatively small percentage of production costs accounted for by minimum wage labor.

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Employers may find it more beneficial to respond to the minimum wage rise with measures to improve their operational efficiency, such as tighter human resource practices with regard to employee management, greater performance standards with emphasis on performance-based remuneration, and enhanced customer services since reducing employment and employment benefits might damage employee morale and inspire retaliation.

Employers can also take advantage of the raise by presenting to their employees how the minimum wage increase is a challenge to the business and using it to engage staff to improve productivity keeping in mind that employees are aware that higher compensation increases the risk of losing their jobs; motivating them to put in more effort in order to avoid being dismissed.

Employers may actually benefit from the increased minimum wage as it is likely to stimulate demand for essential goods and services, as minimum wage workers would instantly spend their extra earnings on previously expensive essential goods or services.

Their expenditure would potentially compensate businesses for the pay increases; balancing the increase in employer expenses.

The raised minimum wage would therefore be unambiguously beneficial to the employers, and to the economy at large.

And as for unemployment? The created demand for products and services shall prompt companies across the economy to hire more workers to meet the increased demand.

The writer is a Human Resource Legal Advisor at Ronalds LLP.

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