Nobel Laureate Says Colombia Must Cut ‘Disastrous’ Minimum Wage

(Bloomberg) -- Colombia must “bite the bullet” and take politically unpopular steps to reduce its minimum wage, according to Christopher Pissarides, whose work on labor markets saw him win the 2010 Nobel Prize for economics.

The nation’s minimum wage of $280 per month is very high compared to productivity, and is a large part of the reason why roughly half of the labor force works without contracts in the informal sector, Pissarides, who teaches at the London School of Economics, said Thursday.

“It was a terrible, disastrous policy for Colombia to raise the minimum wage by more than productivity,” said Pissarides, speaking to reporters in Cartagena on Colombia’s Caribbean coast where he was attending a banking conference.

The national unemployment rate rose to 10.3% in April, its highest level for the month since 2012, even as economic growth accelerated. The arrival of more than 1 million Venezuelans fleeing their country’s economic crisis is “a strong explanation” for the increase, Finance Minister Alberto Carrasquilla said in March.

The government could gradually improve the situation by introducing a lower minimum wage for new entrants to the labor market, or to younger workers, Pissarides said. Strong support from trade unions and politicians for the minimum wage has left Colombia “stuck in an equilibrium which is obviously inferior,” he said.

Colombia’s minimum wage is about 86% of the median wage, according to a 2018 report by Fedesarrollo, a Bogota-based economics think tank. Pissarides said that in European countries, the minimum wage tends to be about 40%-45% of the median.

The government of President Ivan Duque raised the minimum wage by 6% at the start of the year, almost twice the rate of inflation, and the biggest increase in a quarter century, according to the presidency.

--With assistance from Oscar Medina.

To contact the reporter on this story: Matthew Bristow in Bogota at mbristow5@bloomberg.net

To contact the editors responsible for this story: Matthew Bristow at mbristow5@bloomberg.net, Robert Jameson

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