The Federal Fair Labor Standards Act and the Minimum Wage in Georgia
The question of the minimum wage increase figures out to be a complex issue for the state governors and the society in general. Despite the obvious advantages of the minimum wage increase as a tool of welfare state development, it is important to analyze serious threats that can be connected with this process. Here, it is necessary to evaluate the consequences of the decision about the minimum wage level increase for the different segments of the Georgian society business, population, and the government. The discussion of the question from this point makes the initially obvious decision to raise the minimum wage controversial.
Current Socio-Economic Situation in Georgia
To make a right decision about the question of the minimum wage (MW) level increase, it is necessary to consider the socio-economic consequences of this proposition for the Georgian state. In this way, the governor should discuss the current socioeconomic conditions in Georgia. Such analysis will allow defining whether such reform can lead to higher prosperity and good for Georgia, or it will serve as a basis for further deterioration of the situation in the country and will only bring harm. Also, it is necessary to point out the short-term and long-term consequences of this decision to give the most objective and responsible solution. First of all, it can be useful to refer to the situation in the spheres of economic growth, investment attractiveness of Georgia, and the situation in the field of unemployment.
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The Gross Domestic Product (GDP) is the main indicator of the states economic performance. The evaluation of the trends of the Georgian GDP changes on the basis of the expenditure approach requires specific attention. The advantage of using this approach is that the government can consider the information about the main variables that affect the GDP level, and are affected by the decision about the growth of the MW level. These variables are the consumption expenditures of households, the investment expenditures of business, the expenditures of government institutions, and the net exports value. As it will be explained later in this memorandum, the growth of the MW will affect the three variables from this list - the consumption expenditures of households, the investment expenditures of business, and the expenditures of government institutions. So, it is clear that the growth of the MW will affect the countrys GDP. First, it is necessary to evaluate the current changes in the Georgian GDP and the reasons that lie behind them.
Georgian GDP Changes
Appendix 1 presents the dynamics of the GDP level of Georgia. It shows that the Georgian GDP had suffered a rapid decrease during the last two years. Appendices 2-4 give the information about the main variables that form the current value of the Georgian GDP. According to the statistics, the main causes of the economic decline in Georgia are the reduction of business investment expenses and the decrease of the net export. The volume of these indicators is so high that the government has to ensure losses at the expense of higher governmental expenses. These problems have become relevant for Georgia since 2013, when the decline of all the elements of the countrys GDP led to the economic fall in the state (Janashia, 2013). The rapid growth of the government expenses in 2016 was the result of the intention of the state authorities to stabilize the economic situation. Nevertheless, it is difficult to assert that such solution of the current problems can be effective in the long term.
Current Limitations of the Georgian Economic Policy
As a result, the current economic issues of Georgia include the necessity to increase the business investment expenses, the requirement for growth of the net export value, and the development of the program of domestic consumption level growth. From this point, the perspectives of the MW level increase in connection to these targets of the Georgian economic development require explanation.
Arguments for the Increase of the Minimum Wage
This section will highlight the positive aspects of the MW level increase and the necessity of the economic development of the Georgian state to compare them to the negative consequences of MW level increase.. Therefore, it is necessary to evaluate the short-term and long-term consequences of this decision.
The Increase in the Level of Consumer Demand
The first positive aspect of the MW level increase is the obvious growth of the level of the consumers wages in Georgia. This fact will definitely lead to the growth of consumer demand level and the consumption expenditures of households. Such conditions are supposed to lead to the growth of the countrys GDP level, which is also a positive argument for the realization of the proposed reform. At the same time, the increase of the consumer demand level will not only lead to the growth of the GDP. It can also provide the necessary funds for the support of the domestic companies through the growth of their sales volume. Nevertheless, it should also be stated that the business sector of the Georgian society may cause the reduction of the positive effect from the growth of the MW. On the one hand, the increase of the wages will cause the occurrence of the demand inflation, which can minimize the positive effect and create even more problems for the states economy. On the other hand, the accumulation of household funds in inventories will also not allow achieving the desired positive result for the economy.
The Resolution of the Poverty Problem
Many economists consider the increase of the MW level as one of the most effective means of the poverty problem resolution. The increase of the salaries is supposed to provide additional funds for the improvement of the populations life quality. The provision of the adequate MW is one of the postulates of the modern welfare state. Nevertheless, it is important to evaluate the real conditions of the MW level increase. If the poverty among the Georgian citizens exists due to the lack of working places, the growth of wages will not contribute to the resolution of this issue. Even more, the growth of wages is supposed to decrease the amount of potential working places, which will also be considered in this memorandum. In this way, it is necessary to perform additional sociological research that will define whether the poverty is caused by the high level of unemployment or the low level of wages. Also, it is obvious that the growth of the MW level can lead to the resolution of the poverty issue in the short-term period. The other important aspect is whether such positive trend will be maintained in the long term.
The Accumulation of the Human Capital
The latest research of the workers productivity factor has stated that the level of wages has an important influence on the employees productivity. In general, the growth of the MW can stimulate the rapid development of the human capital in Georgia (Teulings, 2002). In fact, the significant growth of the MW level can create a motivation for the employees to increase the quality of their work to keep the workplace. This argument will be especially relevant in the conditions of the unemployment rate increase, which will also take place due to the increase of the MW level.
The Increase of the Profits from the Personal Income Tax
The growth of the MW level will increase the taxable base for personal income tax (PIT). In this way, the proposed reform will provide additional funds for the aims of the formation of the budget of the country. These funds can be used for the increase of the states expenditures value, which will positively affect the value of the Georgian GDP. In this way, the growth of the MW can provide advantages not only for the population but also for the state. These funds can be used for the realization of the infrastructure and socioeconomic projects of the government. Nevertheless, it should be mentioned that these funds will be removed from the budgets of private companies, which pay taxes. This fact will decrease the business attractiveness of Georgia for domestic and foreign investors.
Arguments against the Increase of the Minimum Wage
In the previous chapter of the memorandum, the positive aspects of the proposed reform have been discussed. In this part, it is necessary to provide more specific analysis of the potential threats connected to the realization of the MW growth plan.
The Increase of the Unemployment Rate
One of the actual threats that will definitely take place after the realization of the proposed reform is the growth of the unemployment rate in Georgia. This fact is connected to the microeconomic law of demand. According to it, the customer prefers to reduce the consumption value in the conditions of the prices increase. In these conditions, the increase of the MW serves as a factor of reduction of demand for labor among the Georgian business. To survive in the new conditions, the companies will have to reduce the number of employees. Here, the government will create the conditions for the growth of poverty instead of its reduction.
Another question under consideration is whether the government can afford the certain growth of unemployment rate due to the improvement of living standards of the employed population. Appendix 5 gives information about the current level of unemployment rate in Georgia. Appendix 6 shows unemployment rate among the Georgian youth, which is the most interested in the search of the new workplace. The statistical data shows that the Georgian government will definitely face the negative consequences of the MW level increase, which will include the unacceptable growth of unemployment, especially among youth. As soon as the youth is the most politically active segment of modern society, a proposed decision can lead to social instability in the state.
The Disadvantages for the Business
As it was mentioned earlier, the business segment of the Georgian society will face most disadvantages of the realization of the MW reform. First of all, it will suffer the reduction of net income due to the growth of wages expenditures. Second, the growth of personal income taxes value will increase tax pressure on business. Third, the necessity to lay off workers to maintain the current profitability of business can destroy the current business processes of companies, which will not only affect the volume of production but will serve as a basis for a serious crisis in industries dependent on high-quality personnel. At the same time, the growth of unemployment can become a reason for the reduction of demand for the companies goods. In this case, the risks seem too high for the realization of the reform. As a result, the increase of the MW level will create additional risks for business in Georgia. It will definitely affect the business attractiveness of the state and reduce the investment expenses. In this case, it is difficult to say about the perspectives of the required GDP growth of the country.
The Growth of the Production Costs
The previous part of the memo has discussed the negative consequences of the proposed reform for the business in Georgia. However, one of the most important threats to the Georgian economy is the growth of production costs that will affect the prices in the country. In this case, the supply inflation can minimize the positive effect of the MW level increase and even reduce the real quality of life in Georgia. Taking into account the growth of prices, the real wages of the population may remain the same. For the unemployed population, the situation will become even worse. From this point of view, it is difficult to consider the proposed reform as a means of the welfare state development.
The other aspect of this problem is the question of the net export value increase. In the conditions of the growing prices, it will be difficult for the Georgian companies to maintain their competitive positions on the foreign market. The only possible solution to this problem can be the depreciation of the national currency of Georgia. Since the modern Georgia is the import-dependent country (Appendix 2), such decision can cause even more problems for the economy of the state. Anyway, in the modern conditions, it is difficult to propose a solution for the situation of the prices growth in Georgia. That is why the best decision will be to avoid such situation.
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The Expansion of the Shadow Economy Sphere
The earlier discussed problems for the Georgian business will definitely lead to the expansion of the shadow economy in the country. The business will be interested in the reduction of tax payments and will prefer to hide real employees salaries. Such situation will decrease the states tax incomes and create the conditions for the decrease in the manageability of the national economy by the state.
The Decision of the Georgian Governor
Taking into account the discussed arguments, the Georgian governor can take the only correct decision in the current socio-economic situation in the country and to refuse to pass the law about raising the minimum wages. The presented arguments may become a basis for the opposition to claim the existence of business lobby in the Georgian government. Nevertheless, it seems to be the only decision that can guarantee the maintenance of the current level of economic development in Georgia. Business society plays a vital role in the development of the states economy. In the conditions of the reduction of business investment expenditures and net export, the support of business can be the only way of the countrys GDP growth. However, the population should understand that the increase of the MW level will not give them real advantages in the long-term period. The consumers can face the positive consequences in the short term, but the growth of inflation will overcome them in the long-term perspective. Even more, the growth of unemployment can create conditions for the growth of poverty in Georgia.
In general, the complex analysis of the current situation in the country makes it impossible to consider the proposed reform as a real mean of the welfare state development in Georgia. A more honest conclusion is a statement that the political party that has made a proposition about the increase of the MW level is interested in cheap populism, which can be dangerous for the economic and social security of the country in the long-term perspective. The politics seem not to have studied the current conditions in the countrys economy, which make it impossible to realize their plan. Instead, the politicians should consider the opportunities for how to improve the countrys business attractiveness and develop its foreign trade. The resumption of an effective political dialogue with Russian Federation, which is the countrys strategic trading partner in the region, is the best opportunity for the state.
The consideration of the positive and negative consequences of the proposed reform realization makes it possible to conclude that the Georgian government and society will not win from the growth of the MW. Even more, the realization of this plan can lead to the certain profits in the short term but can become a problem for the society in the long term. As a conclusion, the government should not be tempted by current benefits for the society and the possibility of political PR. The increase of MW can be fatal for the current conditions of the GDP and unemployment level in Georgia.