By Edam Shem

An attempt at Better Economic Outcomes

In October, the Kenyan government announced a new minimum wage order, increasing it by 6%, which translates to a monthly minimum wage of 15,201 KES, making it one of the countries in Africa with the highest minimum wage cap. This decision comes at a time when inflation is on the rise, and the cost of living has cut deep into the lives of many Kenyans. While the planned increase in wages is an effort to increase the standard of living of those in the lower-wage employment bracket, it is accompanied by a great deal of controversy concerning its impact on the general economy, individual organizations, and the labor market as a whole.

Kenya’s economy has faced several shocks over the recent past that have affected its economy with the emergence of COVID-19, rising food prices, and soaring energy costs. The Kenya National Bureau of Statistics reports that inflation hit 6.6% in early 2024, further straining financial balances in households. Thus, the establishment of a higher minimum wage is assumed to be aimed at offering cushion impacted workers.

A case of minimum wage hikes

In 2020, Kenya’s minimum wage was increased to Ksh. 13,572 KES, a 12% increment from the previous cap, to combat inflation rates while improving the welfare of impacted employees. In 2022, the government announced a 5% increase, raising the minimum wage to Ksh. 14,000, after stagnant rates in 2021 due to economic disruptions from COVID-19 pandemic on businesses. The newly imposed 2024 raise represents a new attempt to relieve financial pressure from the government’s tandem to current economic hardships and in pursuit of decent standards of living.

Comparatively, neighboring Uganda, has a wage bill of about UGX 130,000 per month, effective since 2017. Tanzania has a minimum wage ranging from TZS 40,000 to 400,000 per month, while Ethiopia offers a round figure of ETB 5,000. Rwanda’s minimum wage is about RWF 100,000 (around $96), still lower than Kenya’s new wage, and on a broader scale, South Africa boasts one of the highest minimum wages on the continent at R27.58 per hour, translating to approximately $242 per month. Comparatively, while Kenya’s new minimum wage is relatively higher than those of its immediate neighbors, it still falls short compared to some African nations like South Africa.

Maximizing the gains of a Minimum Wage Increase?

Undoubtedly, one of the most direct effects of the wage increase is its potential to alleviate poverty. Low-income earners who struggle to meet their basic needs such as food, shelter and healthcare in the face of growing inflation could potentially benefit. An increase in the wage might go a long way help to raise their standard of living, and could even make them more financially secure.

Is a minimum wage necessarily good for empty pockets? Image Nicola Barts via Pexel

An increase in the minimum wage is, at least in theory, is associated with, increased consumer expenditure, critical for the development of the economy. Higher wages imply a higher expenditure on products and services, boosting local enterprises and increasing activity in the economy. It also has equity-enhancing effects in the labor market besides having an impact on levels of compensation paid and addressing historical injustices in labour relations.

When a minimum wage cap fails

Small and medium enterprises (SMEs) can be ill-feted by a minimum wage as a critical segment of the Kenyan economy. The majority of these firms are extremely sensitive to changes in profits with a rise in labor cost likely to lead to downsizing, layoffs, or shutdowns. Critics, argue that increasing the minimum wage could lead to inflation. High labor costs are passed on to consumers through hiked prices on products and services. This counteracts any positive gains from minimum wage increase.

Setting a higher Minimum wage can further lead to unemployment as those in low margin small business may not afford expensive human resources. Consequently, employers may for instance be reticent in hiring new staff. The subsequent effect is potential higher unemployment, especially youth joblessness, and further joblessness among unskilled workers.

Economic Perspectives: Striking a Balance

The current minimum wage rise can be viewed as a microeconomic blessing and a macroeconomic curse. What remains hazy for policymakers is how this is to be achieved without negatively impacting employment generation or exerting an excessive burden on businesses.

To reduce the capability of the policy to harm SMEs, the government could consider support tools, such as tax credits or grants, for businesses to ease the new wage regulation to back businesses during an economic meltdown.

Amidst this murkiness, it remains uncertain about how Kenyans will benefit or be affected by this wage increase all this hinging on policy shifts, flexibility of business, and the general economy. This 6% hike in the minimum wage is a major core structural change in the labor environment in Kenya. Primarily, it also creates a warning that it’s important to maintain a balance between supporting workers and fostering a sustainable economic environment. Ultimately, although a wage increase is a way of alleviating the lives of many Kenyans it is important to check on the long-run impacts of the increase on the economy, employment and business ventures.

These are the writer’s own opinions and do not necessarily reflect the viewpoints of Liberty Sparks. Do you want to publish in this space? Contact our editors at [email protected] for further clarification.