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Cablegate: Moderate Minimum Wage Increase, Record Low Inflation

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DE RUEHBO #0139/01 0341339
ZNR UUUUU ZZH
R 031339Z FEB 10
FM AMEMBASSY BOGOTA
TO RUEHC/SECSTATE WASHDC 2465
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA
RUEHBR/AMEMBASSY BRASILIA
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHCV/AMEMBASSY CARACAS
RUEHLP/AMEMBASSY LA PAZ
RUEHME/AMEMBASSY MEXICO
RUEHOT/AMEMBASSY OTTAWA
RUEHPE/AMEMBASSY LIMA
RUEHQT/AMEMBASSY QUITO
RUEHSG/AMEMBASSY SANTIAGO
RUEHZP/AMEMBASSY PANAMA

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

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