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Cablegate: Goe Backs Off Proposed 50 Percent Increase in Minimum Wage

VZCZCXYZ0011
RR RUEHWEB

DE RUEHQT #0130/01 0331715
ZNR UUUUU ZZH
R 021713Z FEB 10
FM AMEMBASSY QUITO
TO RUEHC/SECSTATE WASHDC 0906
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBO/AMEMBASSY BOGOTA
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEHCV/AMEMBASSY CARACAS
RUEHGL/AMCONSUL GUAYAQUIL
RUEHLP/AMEMBASSY LA PAZ
RUEHPE/AMEMBASSY LIMA
RUEHQT/AMEMBASSY QUITO
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC

UNCLAS QUITO 000130

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ELAB EINV EC
SUBJECT: GOE BACKS OFF PROPOSED 50 PERCENT INCREASE IN MINIMUM WAGE
FOR 2010

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Summary

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1. (SBU) Ecuador's President Correa has publicly championed the
idea of a "dignified wage" since taking office in 2007, and this
concept is enshrined in the country's 2008 Constitution. Last
year, Correa frequently called for an almost 50% increase in the
minimum wage to reach his definition of a dignified salary. In the
end, the administration raised the minimum wage by only 10% for
2010. Despite private sector claims that GoE labor policies have
reduced labor flexibility and increased unemployment, the 7.9%
unemployment rate in December 2009 reflects an increase in
employment at year-end. End Summary.

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GOE increases minimum wage by 10% for 2010

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2. (SBU) After entering office in 2007, President Correa announced
his objective of implementing labor reforms in accordance with the
country's new Constitution that would, among other things,
establish a "dignified wage" for all workers. In theory, the
dignified wage would be sufficient to enable a family to afford
Ecuador's basic consumer basket. In August 2009, Minister of Labor
Richard Espinosa suggested $320 as a dignified monthly wage based
on a consumer basket cost of around $519 and 1.6 wage earners per
family, an amount publicly supported by President Correa.

3. (SBU) Fearing a jump of almost 50% at the end of the year from
the current minimum monthly wage of $218 to $320, the private
sector engaged in intensive consultations with the administration.
Companies argued that the suggested increase in the minimum wage
would have catastrophic economic consequences as businesses,
especially in labor-intensive industries such as rose cultivation,
and textiles and apparel, could be forced to close. (Comment:
Private sector contacts in the flower and textile and apparel
industries have told EconOffs that the threat of a large wage
increases had essentially brought to a halt any new investment in
their sectors.)

4. (SBU) After negotiations within the National Council for
Salaries on setting a new minimum wage for 2010 broke down in
mid-December, Minister Espinosa announced on December 31 a 10.1%
increase in the minimum monthly wage, raising it to $240.
According to Espinosa, approximately 4 percentage points of the
increase were attributable to inflation, another 4 percentage
points to productivity gains (although there is no entity that
officially tracks productivity in Ecuador), and 2 percentage points
were added to improve salary equity. The new minimum wage applies
to all private sector employees, including for the first time
domestic employees, artisans, and small industries and agricultural
workers. The 2010 minimum wage represents a hike in salary of
between 20% and 30% for these groups. The minimum wage has risen
steeply over the last three years from $170 in 2007, when Correa
took office, increasing 17.6% in 2008 and 9% for 2009.

5. (SBU) Workers, who had expected a 46.8% increase for 2010,
based on Correa's public references to a $320 "dignified wage,"
were dissatisfied with the new minimum wage and threatened public
protests. While significantly lower than the $320 figure that had
been bandied about, businesses also complained about the increase,
claiming it would still harm small businesses and the agricultural


sector, which have been hit hard by previous tax and labor reforms.
As a result of the pay hike, employment of domestic staff could
also decline, particularly by middle class employers.

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Measures adopted to reach the dignified wage

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6. (SBU) As a follow-up, on January 8, Minister Espinosa announced
labor code reforms the GoE will propose to the National Assembly.
The reforms would provide workers with more disposable income on a
monthly basis, without increasing wages. According to current
Ecuadorian law, private sector workers receive as additional
compensation two monthly salaries per year to cover education and
Christmas season expenses. The proposed reforms would now allow
employers to spread out this compensation and pay it on a monthly
basis.

7. (SBU) Espinosa's proposal also appears to accept the private
sector's contention that all compensation components should be
considered when analyzing whether a particular wage structure
actually provides a "dignified wage." For instance, Espinosa
suggested the GoE's calculation of total salary might include the
additional two monthly salaries, and payments to the employee's
"reserve fund" (equal to another month's wages) paid out on a
monthly basis. (Note, in July 2009, the National Assembly already
passed a law to allow employers to pay employees directly on a
monthly basis the amount previously deposited into their "reserve
fund.") The eventual goal would be to set the minimum wage so that
this total multiplied by 1.6 would cover the cost of the consumer
basket. With the 2010 minimum wage, the total salary under this
formula equals $300. Multiplying by 1.6 wage earners per family
produces a household income of $480, $48.90 short of the current
consumer basket cost of $528.90, as estimated by the Ecuadorian
Statistics Institute (INEC) in December 2009. In the meantime,
mandatory profit sharing is expected to help bridge the gap.
(Current law already requires companies to distribute 15% of
profits among their workers, but compliance is uneven.)

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Comment

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8. (SBU) Although the private sector has complained about the
minimum wage increase, this is a rare instance in which the GoE
appears to have taken their arguments into account when setting
wages policy. Meanwhile, the GoE's minimum wage decision and new
proposals have not strengthened relations with labor. Alex
Gonz????lez, representative of the United Workers Front (FUT), an
important umbrella group for organized labor, said in reacting to
the GoE's new proposals that the administration's decision "to
transfer money from one pocket to another, as it did with the
reserve funds, is a mockery of the workers."

9. (SBU) It also may be difficult in the short-term to evaluate
the employment effects of Ecuador's new minimum wage. Although
INEC released an unemployment figure showing an improvement from
9.1% in September to 7.9% in December 2009, some private sector
representatives have openly questioned the veracity of this
improvement. Private analysts point to job cuts in a number of
sectors, such as rose cultivation (7,500 jobs lost in 2009), and a
reduction in commercial activity in the last two months of 2009
caused by rolling blackouts. Although the private sector has


expressed concern that any increase in Ecuador's minimum wage could
damage the country's competitiveness vis-????-vis its neighbors,
analysis by a well respected local economist suggests the dollar's
depreciation has kept Ecuador's new minimum wage on par in real
terms with those in Brazil, Venezuela, and Colombia.
HODGES

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