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The Vanuatu Minimum Wage Increase

On May 9 the Vanuatu Government announced that the minimum wage for workers would be 300 vatu per hour effective from the 1st June. This increase was a 36% increase from the previous rate of 220 vatu.

The background to the minimum wage increase.

Over the past few years, there has been extensive public discourse regarding the minimum wage. The previous rate, set at 220 vatu since 2019, saw an increase from 200 to 220 per hour. Prior to that, in 2017, the rate had risen from 170 vatu. Due to the economic conditions brought about by the COVID-19 pandemic, any discussions regarding minimum wage increases were postponed. However, with the conclusion of the pandemic and the reopening of the country’s borders, the topic of minimum wage hikes was once again under consideration.

After the Snap Elections in October 2022, the newly formed government prioritized implementing an increase in the minimum wage. This decision was driven by significant price hikes in basic food items resulting from the pandemic and the Ukraine War. There was clear evidence of support for an
increase in the Minimum Wage.

The Tripartite Labour Advisory Council (TLAC), comprising representatives from the government, employers, and workers’ unions under the Ministry of Internal Affairs, serves as the mechanism for reviewing minimum wages. Chaired by the Commissioner of Labour, TLAC includes the Vanuatu
Chamber of Commerce and Industry (VCCI) as the employers’ representative and the Vanuatu Council of Trade Unions Combine (VCTUC) representing workers. Under the Minimum Wages Act (CAP 182), TLAC’s primary role is to conduct necessary investigations and submit wage proposals to the Minister after considering factors such as the needs of workers and their families, general wage levels, cost of living and its changes, social security benefits, relative living standards of other social groups, and economic factors related to development, productivity, and employment levels.

The minimum wage rate has undergone the following increases:

2017: From VT170 to VT200 (17% increase) 2019: From VT200 to VT220 (10% increase) 2023: From VT220 to VT300 (36% increase)

As a result, the minimum wage rate of 300 vatu per hour has seen a 76% increase over a six-year period, compared to the rate prior to 2017, which stood at 170 vatu. At the time of the announcement, the Commissioner of Labour and Chair of TLAC, Murielle Meltenoven, said this minimum wage increase is based on the Consumer Price Index (CPI) considering the high cost of living triggered by inflation.

To put this in to context the following CPI changes were reported from information obtained from the Vanuatu National Statistics Office

The rate of change in the CPI index from 2017 has been 21.4%

The response from the VCCI?

In response to the announcement, the VCCI who represents the business community expressed concerns on the magnitude of the increase.

In a statement published on its website, the VCCI stated.

The Vanuatu Chamber of Commerce and Industry (VCCI) is greatly disappointed to learn that despite all concerted efforts to delay the proposed 36% increase to Vanuatu’s minimum wage, the Government is intent on enacting the increase from 1 June 2023.

“The VCCI has attempted to work cooperatively in good faith with the Vanuatu Government, including the Department of Labour, to ensure a balanced approach to any increase to Vanuatu’s minimum wage so that will not adversely affect Vanuatu’s economy and compound cost-of-living pressures,” said Antoine Boudier, the VCCI President.

“We are deeply concerned about how this decision has come about without any private sector consultation and leaving inadequate time to prepare for its implementation and call on the Government to not proceed with gazetting of the Order. ”

“In recent press statements, the Commissioner of Labour is reported to claim that the increase was supported by Vanuatu’s Tripartite Labour Advisory Council (TLAC). The VCCI corrects this inaccurate statement. The TLAC never approved this wage increase. Due process has not been followed,” said
VCCI President Boudier.

The VCCI went on further to state that the rate of the minimum wage increase would affect the low skilled and low income earners, affect meat prices and push prices up further as businesses pass on the cost increases contributing to increases in the cost of living.

How does Vanuatu compare in labour costs to other neighbouring countries. Will it have an effect on foreign investment in job creation, especially in hospitality and Tourism?

In comparison to Vanuatu’s neighbouring countries, of PNG, Solomons, and Fiji, Vanuatu has one of the highest labour costs in the region. With Labour on-costs of Severance, Annual Leave, Sick Leave and VNPF, an additional 30.92% is added on to the wage rates of Vanuatu workers. At a rate of VT300 per hour, this would mean that the minimum wages of Vanuatu workers would now be VT393 per hour. The below table outlines the comparative costs of Labour in Melanesia,

When it comes to attracting foreign investment in tourism and industry, Vanuatu competes with its neighboring countries. Vanuatu and Fiji both compete to attract foreign investment in tourism and industry. Labor costs are a crucial factor influencing investment decisions, particularly in labor-intensive sectors like tourism and hospitality. The upcoming increase in Vanuatu’s minimum wage on June 1st can indeed have implications for foreign investment and business expansion plans.

Comparing labor costs with Fiji, where the minimum wage is currently FJD4 (USD1.86), it is noted that the minimum wage in Vanuatu is VT220, which is comparable. However, labor oncosts in Fiji amount to only 19.84% of the total labor costs. This makes Fiji more attractive in terms of overall labor costs when
compared to Vanuatu.

With the impending increase in Vanuatu’s minimum wage, the gap between the two countries in terms of labor costs is expected to widen further. This might have implications for investment decisions, salary reviews, and hiring choices. It is worth considering that the specific impact on investment and businesses will depend on various factors beyond labor costs alone, such as market conditions, infrastructure, regulatory environment, and the overall business climate.

So what really will happen on June 1? Will it increase prices? Will prices increase and by how much?

On June 1st, a new regulation will require all employers in Vanuatu to pay their staff a minimum wage of VT300 per hour if they are currently earning less than that amount. This 36% increase in the minimum wage does not necessarily mean that wage costs across the entire country will increase at the same rate. Instead, it signifies that employees who are currently earning less than VT300 per hour will experience a wage increase, while those already earning VT300 or more will not be affected.

The impact of this increase will likely be seen in planned salary reviews by employers, as they will need to consider how the minimum wage hike affects the overall cost of employing staff. For instance, if 20% of an employer’s payroll consists of workers currently earning the minimum wage, the actual increase in wage costs for the employer would only be 20% of 36%, which equals 7.2%.

As a result, salary increases for employees who already earn VT300 or more may also be affected by the new minimum wage, along with hiring decisions. The individuals who will be most affected by and benefit from this increase are those who have been earning below the new minimum.

What are the Overall Economic effects of the increase in Minimum Wages

The Vanuatu Government will be increasing the Minimum Wage at a rate that is much higher than the inflation rate. Increasing the minimum wage at a rate much higher than inflation can have both positive and negative economic effects. Here are some potential consequences:

One of the primary benefits of increasing the minimum wage is that it raises the income of low-wage workers. This can reduce income inequality and improve the standard of living for those at the bottom of the income distribution. Increasing the minimum wage can also help reduce poverty rates and narrow the wealth gap. This can lead to increased consumer spending and stimulate economic growth as low-income individuals have more disposable income to spend.

On the negative side, one of the concerns with significantly increasing the minimum wage is that it could lead to job losses, particularly in industries that heavily rely on low-wage labor like Building and Construction. Businesses may respond to higher labor costs by reducing hours, cutting jobs, or even automating certain tasks. Small businesses, in particular, may struggle to absorb the increased costs and could face financial difficulties or closure.

A large and rapid increase in the minimum wage will also create inflationary pressures in the economy. When businesses face higher labor costs, they may pass those costs onto consumers in the form of higher prices, contributing to inflation. The specific impact on employers and employees may vary depending on various factors, such as the size and nature of businesses, industry dynamics, and the overall economic climate.

Adam Smith, the founder of free market theory and the author of the book, “ The Wealth of Nations” theorized that if the market is allowed to operate free from Government intervention, the equilibrium price would be determined by interaction of the market forces of supply and demand. In the real world, this is never achieved and governments around the world have intervened to protect the welfare of workers. In the case of Vanuatu, the government has now intervened on the price of labour by setting the minimum wage. Market forces will now be in play to determine what happens to employment, the cost of
living and economic growth in the Country.