HOW THE INCREASING OF THE MINIMUM LIVING WAGE CAN AFFECT ECONOMY

Name: Nathaly Arias

Date: 10/26/2016

HOW THE INCREASING OF THE MINIMUM LIVING WAGE CAN AFFECT ECONOMY

I. INTRODUCTION

Thesis Statement:

Although an increase in the minimum living wage brings positive effects on the economy, it could have serious consequences for employment levels and formality in the country

II. BODY

A. An increase in the minimum wage promotes a higher level of domestic aggregate demand.

1. Opinion of economist Jorge Gonzales

a. The alignment of the increase

b. The need to promote a higher level of domestic aggregate demand.

2. The Minimum Living Wage raises production

B. Increasing the minimum living wage increases production costs in the formal sector.

1. Consequences

        a. Layoffs

        b. Lower employment rate

        c. Increased levels of informality

C. The “Ley Pulpín”

III. Conclusion

Increasing the minimum living wage increases purchasing power and demand in the market. However, this could also have negative effects in employment and formality due to the current context of the Peruvian economy.

HOW THE INCREASING OF THE MINIMUM LIVING WAGE CAN AFFECT ECONOMY

In the current context of a slowdown in the Peruvian economy, falling exports and weakening business confidence, the decision to increase the minimum salary has left many comments. Although an increase in the minimum living wage brings positive effects on the economy, it could have serious consequences for employment levels and formality in the country.

Some economists say that an increase in the minimum wage promotes a higher level of domestic aggregate demand. According to economist Jorge Gonzales, raising the minimum wage is aligned with the criteria for inflation and productivity, so that the increase would not affect the economy. Even more, it was necessary to promote a higher level of domestic aggregate demand since it would increase the purchasing power and production. This effect is greater than the highest real cost.

On the other hand, it is true that increasing the minimum living wage increases production costs in the formal sector. This would result in layoffs mainly in micro and medium enterprises that are the most affected. Furthermore, the employment rate could be affected too. Raising the minimum wage will cause many companies to postpone their decision to incorporate new workers. Additionally, an increase in the minimum wage increases levels of informality.

As well, there is a lot of controversy about the “Ley Pulpín”. The government last year sought to boost the integration of young people in the formal labor market with the so-called 'Ley Pulpín'. And now, with the increase of salaries, the government is restricting the access to this market.

...