Throughout the world, in states, cities and countries, a conversation continues to revolve around the social concept of a living wage or a definition of the minimum income necessary for a worker to meet their basic needs.

This conversation has gathered momentum with the increasing populism that now dominates much of the political discourse and even policy considerations. Bermuda is no different and we now find ourselves questioning social equity and the state of labour on the island.

Inequality

There are three overarching aspects that may be the impetus for the recent thrust in demanding further focus on some form of wage equality. They coalesce, in various forms, around growing inequality and shrinking worker opportunities due to forms of globalisation, technological obsolescence and/or global consolidation of winners.

The economic benefits of recent technological advancements have not been shared widely. Productivity has increased globally but real median wages in various regions of the world, notably in the US, have stagnated, leading to a large reduction in labour’s contribution to gross domestic product.

The consequence has been the widening gap between the rich and the poor, or inequality. Essentially, this is because capital tends to be concentrated in the hands of the wealthy. In fact a 2013 study by Loukas Karabarbounis and Brent Neiman suggested that 42 out of 59 surveyed countries have actually experienced a fall in labour’s contribution to GDP. It is worth noting that about half of this decline is the result of the substitution of capital for labour because the latter’s price has declined relative to the former with advances in technology.

Inequality has a true cost in terms of economics as well. The IMF working paper Income Polarisation in the United States (Alichi, Sole) suggests that from “1998-2013, the rise in income polarisation and lower marginal propensity to consume have suppressed the level of real consumption at the aggregate level, by about 3½ per cent — equivalent to more than one year of consumption.”

The OECD paper Focus on Inequality and Growth (December 2014), suggests that “income inequality has a negative and statistically significant impact on medium-term growth. Rising inequality by 3 Gini points, that is the average increase recorded in the OECD over the past two decades, would drag down economic growth by 0.35 percentage point per year for 25 years: a cumulated loss in GDP at the end of the period of 8.5 per cent.”

There is no definitive statistics on Bermuda’s level of inequality, such as the Gini Coefficient; however we have developed what we feel is a reasonable proxy for what does appear to be a widening gap between the rich and the poor — at least when it comes to income. In taking the highest-paying median subset of jobs from the Bermuda Employment Briefs (senior officials and managers) and comparing it to the lowest median income group (service workers and shop and market sales workers), we can see a concerning trend.

Since the recent peak of employment in 2008, those with top-paying median incomes have seen wages climb nearly in a straight line. The nearly 2.5 per cent annual advance in median income has exceeded the pace of Bermuda’s consumer price inflation rate which has annualised about 1.7 per cent over the same period.

The lower tier of median workers, however, has constantly seen lower median wage growth than inflation and even suffered a three-year period of non-existent median income growth. Their annual median wage appreciation has only been 1.6 per cent.

Although this is only one simple measure, it would suggest that the gap between the rich and poor has seen periods of widening. This measure, however, does not take into account capital owned by the wealthy.

In Bermuda, the level of capital wealth lost over the last several years may have been disproportionately large, owing to the collapse in real estate prices and local equity shares. It would be incorrect to suggest that the wealthy have not suffered: they have done so immensely through capital losses in holdings of local real estate and Bermuda shares. If, however, they had been prudent and diversified internationally they may have escaped this devastation of wealth.

While the true level of wealth disparity may be impossible to calculate, it is rather evident that certain higher-level income jobs have not suffered as much as those at risk of outsourcing, automation and computerisation.

As technology continues to advance and capital continues to substitute labour, inequality may likely only increase with polarisation in relevant jobs and wages.

Various forms of wage regulation

There are a multitude of wage policy initiatives being discussed around the world and this ads to some of the confusion surrounding this issue. Three forms of labour price consideration and social policies include; Universal Basic Income, Minimum Wage and a Living Wage. Their definitions and a basic discussion follows.

Universal Basic Income

UBI refers to a form of social security in which all citizens or residents receive an unconditional sum of money from the government that is independent of any other income. In essence, there are no strings attached to this payment and amounts are not means tested.

UBI can be in the form of full basic income, or a payment sufficient to meet a person’s basic needs, or a partial basic income, one which only partially covers one’s basic needs.

There have been only three real UBI studies that we are aware of. Only two of these have involved more than 1,000 people. One was the Mincome study in Canada in the 1970s. Analysis by Manitoba economist Evelyn Forget indicated some positives associated with this study including that “a Guaranteed Annual Income, implemented broadly in society, may improve health and social outcomes at the community level”.

Another study was conducted in Indian State of Madhya Pradesh from 2011 to 2012. This one also found a number of positive outcomes including improved food sufficiency and nutrition, reduced incidence of illness, improved school attendance and greater likelihood of reducing debt levels.

One of the biggest drawbacks and complications of the UBI is its cost. Without any form of conditionality, granting an income to all of society’s citizens would create an enormous burden on the public system.

Minimum wage

The minimum wage is basically the minimum amount of remuneration that any employer is required, by law, to pay wage earners for work being performed over a certain period. This, of course, is often quoted as a minimum hourly rate.

Unlike UBI, it is tied directly to working hours and is only paid for actual employment. There have been numerous studies on the effect of a minimum wage, far too many to comment on in detail here. Needless to say, the debate is not settled and one will always be able to point to studies that suggest it is harmful or not harmful.

Many economists would assume raising the price of something, all other things being equal, would be detrimental in general and create job losses but it has proven to not be that simple.

For example, the National Employment Law Project Raise Wages, Kill Jobs? suggests “basic economic indicators show no correlation between federal minimum-wage increases and lower employment levels, even in the industries that are most impacted by higher minimum wages”.

Goldman Sachs analysts Michael Cahill and David Mericle have examined job-growth patterns across every border in the US where one county had a higher wage than a neighbouring county: “Many studies find no significant impact of minimum wage hikes on employment and because the offsetting boost to demand is likely to be larger than usual at present.”

Of course, studies also found the opposite. One recent case is the University of Washington Study on Seattle Minimum Wage hike in which they estimate the average low-wage worker in the city lost $125 a month, because the hike in the minimum wage reduced the total hours worked by Seattle’s low-wage workforce by about 9 per cent and costs to low-wage workers in Seattle outweighed the benefits by a ratio of three to one.

Living wage

A living wage is often defined simply as the minimum income necessary for a worker to meet their basic needs. This is a lot like the conventional definition of UBI. This term is being used rather extensively in Bermuda now.

In the Progressive Labour Party’s Throne Speech for 2017, they note: “To ensure that workers can live in dignity and are not working simply to remain in poverty, the Government will support a new Parliamentary Committee to complete the work that was started in the last Parliament to examine the living wage. This committee will present Parliament with recommendations for implementing a living wage in Bermuda.”

We would assume the committee would be conducting a study on what they define as a basic income. Along those lines we have decided to estimate what this would be assuming that a basic income equate to a “low-income threshold”.

To do this we are simply updating the analysis conducted by the Bermuda Department of Statistics in a report published in March of 2008 titled Low Income Thresholds: A Study of Bermuda Households in Need.

What follows is a brief description of the methodologies used and inflation-adjusted results. For further details and calculations we encourage readers to get a copy of the original report.

We would note that this is only one definition and various interpretations are possible. The UK, for example, has its own Living Wage Foundation that calculates what a living wage is on a year-by-year basis that is made according to the cost of living based on a basket of household goods and services.

Relative low-income threshold

The March 2008 BDS report suggests that this is the most commonly used threshold measure and is “derived by taking 50 per cent of the country’s median household income”. To get a rough estimate of this we have calculated it two ways.

First we have taken the median household income as reported by the 2010 census and adjusted it for inflation to today. This, of course, implicitly assumes that household income has kept up with inflation in Bermuda which may not be the case.

The 2015 Census, completed but not released, would be a better number to use but unfortunately figures are not yet available.

The second calculation involves taking the median annual gross earnings figure from the latest Labour Market Indicators report for 2016. This is not a household number but gives us an estimate for a single worker. The following table is the summary.

Low-income cut-off

The LICO methodology adopted by the BDS was modelled after the Statistics Canada method to establish “an income threshold below which an individual or a family is likely to spend significantly more of its income on food, shelter, and clothing than the average family of a similar size. The LICO methodology measures the relationship between household income and the proportion spent on food, shelter and clothing.”

From the BDS report:

“i. Statistics Canada estimates the percentage of gross income spent by the average family on food, shelter and clothing using data collected from its Family Expenditure Survey.

ii. Based on historical consumption patterns for Canadian households, Statistics Canada estimates that economically disadvantaged households spend 20 per cent more of their income on these essentials than the average household.

iii. LICOs are defined by adding 20 per cent to average spending levels for each of the household types to reflect the differences in the costs of these essentials.

iv. Families with household income falling below the LICOs for each household type were considered as substantially worse-off than the average family.”

Obviously a revised and current Bermuda Household Expenditure survey in today’s dollars would be the ideal data to use in an updated calculation. In this case we have again taken the findings from the 2007 report which uses data from the Bermuda Household Expenditure Survey and inflation-adjusted them. The updated table follows.

LIT basket of goods and services

This is the final methodology employed. Its methodology from the paper can be described as such:

“The low income threshold is another internationally recognised method that represents the level of household income needed to satisfy the expenditures of a household over a specified period of time based on a market basket of goods and services. The LIT is based on a household’s net or disposable income, that is, gross income net of payroll taxes and transfers.

“The LIT basket comprises two broad expenditure groups: 1. Food Group 2. Non-food Group”.

The government report suggests that the “LIT basket methodology is a “goods and services” indicator of low income. This means that the cost of the goods and services required by the household determines the income needed to meet the cost. This is the primary reason for recommending the LIT methodology for the Bermuda model”.

It also goes on to say that the “LIT measure is the best starting point for addressing the issue of low income in Bermuda. However, no single method of measuring low income can convey the difficulties that are experienced by families in need.”

In this case we have taken line item results from the 2007 year and inflation-adjusted them by corresponding Consumer Price Index component factors. The table below summarised these updated figures:

Summary findings

Pulling together the three methodologies and segmenting them into two categories, single workers and a typical family, offers Table 4 for consideration.

The weekly living wage is calculated on a 52-week year and the hourly amount assumes a 37.5-hour work week. Taking the single adult figures one could consider minimum wages of about $18 per hour. The family figures are somewhat skewed given the relatively low RLIT figure. Hourly wage in this case assumes two people working in a household.

Effective scope

To get a sense of how broadly an adoption of some form of living wage may affect the island we have tried to parse the Employment Brief data. In this case we will use the highest calculated value of $41,555. Taking this value and the occupational data presented in the Bermuda Job Market Employment Brief of May 2017, we can note the following occupational aspects (see Table 5).

A few things to note on these figures. The numbers used are median figures. This would suggest that half of the population in each of these occupational segments earns more than the median amount and half less.

Thus the total number of people effected in these listed groups would less than the total. If we assume half are above and half below the $41,555 threshold, this would mean about 2,400 people are below the low income threshold for these selected categories.

Furthermore, other categories not listed where median gross annual income exceeds the $41,555 level could have members that fall below this threshold so the ultimate number could be higher.

Without more granular data it is not possible to get an accurate count on how many people are below this lower income threshold. In the 2007 BDS study about 11 per cent of the population or some 3,100 households fell below the low income threshold.

It’s also worth noting that some occupations listed within the table contain a disproportionate number of non-Bermudian workers. For example in the restaurant, café and bars occupational listing (assuming one includes sous chef, cook, waiter, etc) there are roughly 1,124 non-Bermudians and about 505 Bermudians.

This begs the question of who does any form of living wage really benefit?

Furthermore, it is the under-25 age group that features prominently in the lower median category. All other age groups score higher on a median basis. This would be expected for lower level entry positions.

Inflating this segment could limit the number of entry-level jobs for younger Bermudians. International companies, who may not be as relevant in this case, may be loath to source entry-level and trainee positions locally if the cost greatly exceeds that in their overseas offices.

Even summer student job positions may be curtailed if minimums are mandated. Thus youth employment could suffer.

Policy considerations

Any implementation of any living wage based regulation such as a minimum wage, should at the very least consider these aspects:

1. What works somewhere else may not work here (danger of incorrect transference).

A very common form of policy adoption is to look at other states, cities, etc and copy their policy. Bermuda is a unique economy and assuming what worked or didn’t work in other locales may not be the best method. For example, Bermuda has limited real estate which makes housing and real estate costs higher than many jurisdictions (shelter represented 58 per cent of expenditure for a single person according to the 2007 government report).

2. How much will it cost and can we afford it?

As with any government policy, there are costs involved. In the case of any labour rate regulation, there will be unintended consequences that could negatively affect certain employers. If financial assistance is the preferred tool, it will cost the government money and this should be tallied in advance in order to not inadvertently ring up huge fiscal deficits that will negatively affect Bermuda’s sovereign rating and/or solvency.

3. Global reality (free trade and technology).

The problem may not be that wages and incomes are too low but that technology and globalisation is competing away labour’s ultimate bargaining power. As a result, mandated wage rates may only accelerate future outsourcing and adoption of cost-saving technology at the expense of job opportunities locally.

4. Help offsetting new policies (tax cut coupled with wage rise?)

If policy is the only agreed upon course of action it would be best, if possible, to offset the cost of employment with other fiscal breaks like tax cuts.

5. Invert the problem (focus on costs).

It is likely the case that it is not simply that wages in some instances are too low but that costs may be too high. It is our belief that price controls are not the answer. Rather, the first avenue should be increasing competition in areas bereft with oligopoly or monopolistic like pricing structures as choice often helps to reduce costs.

6. Incremental implementation with modest increase.

Any form of minimum wage or rate should be implemented gradually and phased in over a time period of sufficient length in order to not irrevocably harm certain industries which are affected. All stakeholders effected should have ample time to adjust to any mandated changes to ensure disruptions are manageable.

7. More than just wage rates.

The problem with many social programmes is that they can reduce the incentive to work. The job market is constantly changing and it is important to incentivise people to retrain and adapt to the changing marketplace. It is not overly useful to raise wages and, at the same time, ignore the other necessary qualitative factors that are needed to retrain the workforce. Giving someone the chance to earn a “living wage” does nothing if they refuse to show up for work on time, offer poor customer service or simply do not wish to acquire the necessary skills for the job. Employer considerations and adequate training are critical to consider.

Bermuda is a very affluent island and for many it is difficult to appreciate the struggles of a segment of our population. Part of this is our society of closed circles where we tend to associate with others in the same socioeconomic circles as ourselves, even on an island this small.

It is hard, however, to discount that there is a segment of our population that is disadvantaged economically and the government often plays a role in helping alleviate any suffering in this regard.

A fully updated low-income threshold study conducted by the Bermuda Department of Statistics would go a long way in assisting policymakers in objectively quantifying this social factor and would greatly assist in the development of an effective strategy.

We hope our analysis offers some quantifiable figures to be used in discussions but note that a fully updated and more rigorous analysis is necessary.

Sources:

The Global Decline of the Labour Share by Loukas Karabarbounis and Brent Neiman.

IMF Working Paper: Income Polarisation in the United States by Ali Alichi, Kory Kantenga, Juan Solé, June 2016.

Focus on Inequality and Growth, OECD, December 2014.

The Town With No Poverty: Using Health Administration Data to Revisit Outcomes of a Canadian Guaranteed Annual Income Field Experiment by Evelyn L Forget, February 2011.

Pathways Perspectives: on social policy in international development India’s Basic Income Experiment by Rasmus Schjoedt.

National Employment Law Project: Raise wages, kill jobs? Seven decades of historical data find no correlation between minimum wage increases and employment levels by Paul K. Sonn and by Yannet Lathrop

Even Goldman Sachs Analysts Say A Minimum Wage Hike Wouldn’t Be A Big Job Killer by Dave Jamieson of the Huffington Post, April, 2014.

Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle by Ekaterina Jardim, Mark C. Long, Robert Plotnick, Emma van Inwegen, Jacob Vigdor, Hilary Wething.

Low Income Thresholds: A Study of Bermuda Households in Need by the Cabinet Office Department of Statistics, March, 2008.

Nathan Kowalski CPA, CA, CFA, CIM is the chief financial officer of Anchor Investment Management Ltd and the views expressed are his own

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