Budget FY25: Why're higher wages indispensable for economic stability?

With the country’s economy continuing to scramble between its debt-funded booms and deficits-driven busts, the purchasing power of the already pinching and scraping masses has so drastically eroded they are forced to cut corners even on their very basic needs.

From food to property, nearly everything has gone out of reach of the general public, which makes up the majority of the population, while their wages or income have stagnated.

The government’s negotiations with the International Monetary Fund (IMF) are poised to cause further impact, especially on the salaried class, making it difficult for them to afford a decent life.

As the country is set to present its budget for the upcoming fiscal year, this article explores the issue of wages, which do not attract due attention from policymakers. The underlying question, or assertion, behind this piece, is why higher wages are inevitable for economic growth in Pakistan.

To get the answer to this question, I spoke to an economist, a trade unionist, and a businessperson, reviewed economic literature with historical significance in dealing with economic crises, talked to members of the public, and analysed the ideas and thoughts gathered before coming to the conclusion in light of the discussion made.

The inflation has adversely affected salaried class and daily wagers. Abbas Zaidi, 34, works at a multinational company integrated into the local economy through the banking sector. He says that inflation has gone so high that he needs to cut down on his and his family’s basic needs.

“I can’t afford air conditioning at home because the electricity bill will affect my overall budget plan,” he says. Without using AC, his electricity bill averages around Rs28,000 and after running the appliance this month due to the sweltering heat, he expects it to reach Rs45,000 to Rs50,000.

In the upcoming budget, he hopes that the government will reduce tax on the salaried class, which for him is 22.5%. “I think that I have been burdened by those who do not pay their taxes.”

He opines that trade has slowed, affecting all local and international businesses in the country because the purchasing power of the public has diminished.

Although Zaidi falls within a relatively better-off economic class, much of Pakistan’s population is concentrated in much lower-income groups. According to a World Bank overview, the poverty level in the country is around 40.1%, with an increase of seven million more Pakistanis who altogether live on an income as low as Rs1,000 a day. This highlights the dire situation many are facing, exacerbated by recent economic shocks and stagnant wage growth (World Bank, World Bank Poverty Data, WID - World Inequality Database).

Khurram Ali, 26, works at an embroidery shop in a shopping mall. He is a skilled worker who learned the craft by spending years of his teenage years on the job as a trainee, or "chota" in the local vernacular.

At the age of 26, married, with a kid, and having to take care of his ailing mother, Ali finds it difficult to survive on this income. “I earn Rs1,500 daily for a 12-hour workday, minus the holidays, such as Sunday and the days when I have to take my mother or other dependents to the hospital. Lately, she has been having trouble with breathing, and in the case of an emergency, it becomes really stressful to arrange the money,” he explains. His monthly income amounts to around Rs40,000, which in current times is insufficient to make ends meet for a family of four.

Since he works in the cash economy or informal economy, and his annual income does not fall within a taxable income group, he does not have to pay any taxes. “After paying for rent, bills, groceries, and healthcare, I am left with nothing and have to opt for credit from friends and family,” he says, adding that he doesn’t see himself coming out of this crisis on this income.

“I either have to look for a better job, which is difficult because I am not educated, or start my own business, which without capital is not possible,” he adds.

While the government, in each budget, announces an increase in the minimum wage, which is already at a dead-low level, implementation remains elusive. According to Zehra Khan, a trade unionist and labour member on the Sindh minimum wage board, in factories, the implementation of the minimum wage is almost non-existent, and most of the workforce is contractual and without any social security and health insurance, despite having faced some of the worst industrial disasters in which hundreds of people were killed.

She said that the world is moving towards a living wage for equitable and sustainable economic growth, while the policymakers in Pakistan are still grappling with minimum wage. A living wage is one that allows the worker and their family to afford a basic and decent lifestyle, and they should be able to live above the poverty line without sacrificing their social and cultural life.

The theory that increasing wages helps improve the economy is associated with economist John Maynard Keynes. According to him, increasing wages can lead to higher consumer spending, which in turn stimulates demand for goods and services, driving economic growth and reducing unemployment. He put forward this theory in 1936, in the years following the Great Depression. The United States policy, the New Deal, was influenced by Keynes's theory, as well as the UK’s post-World War II economic policies. However, Keynesian economics saw a decline by the 1970s when modern economics, advocating neoliberal economic policies, was adopted by several countries including the US and the UK, the two economic powerhouses of a globalised world.

Research shows that neoliberal economic policies had negative effects on workers as the policies aimed at deregulating the labour market, making employment flexible, increasing job insecurity, and leading to the decline of unions through which workers could exercise their right to collective bargaining with their employers. For example, in the United States, the decline in unionisation and the shift towards more flexible labour markets have been linked to wage stagnation and increased income inequality (Pew Research Centre, HDR Human Development Reports).

Economist Dr Kaiser Bengali says wages or income decide how a person will spend their money. Those who have higher income will spend more, he adds.

He also says that in the current times, it is hard for common people to save money because their wages go toward fulfilling basic needs, some of which they have to cut down.

He believes that increasing wages for low-income groups will increase aggregate demand and create a circular economy. On the other hand, when the wages for high-income groups increase, they tend to spend on imported products, in search of better quality, which negatively affects the economy.

He opines that the economy is only strengthened with spending on local products. He says that the government does not ponder increasing wages in its economic planning, and therefore, it does not come into the equation.

“The inflation does not bother them — or the capitalist class — and the burden only falls on the public,” says Bengali.

He adds that the current economic crisis, rising inflation, and stagnating wages that lead to less purchasing power have made it difficult for the public to afford a square meal, and they are cutting expenses.

According to him, the state and capitalists collude to make things difficult for the public.

All Karachi Tajir Ittehad Chairman Atiq Mir says that one of the ways through which the economy can be made stable is by reducing the perks and benefits that elites are enjoying, and the government should cut its spending on luxuries. “This will be a message to the public that the government is serious about putting things in order and has started making changes to its institutions.”

Mir adds: “This does not look good when the ministers of a country go on foreign trips with their large entourages in a picnic style.” 

He says that to pay employees a higher wage, the employer needs to have a suitable business environment. In the current situation, the electricity rate is exorbitantly high, and new tax policies need to be just. “The public and businesspersons have to pay double taxes on a single product or transaction, which is a flawed system and needs reconsideration.”

He says that given the current business situation in the country, “the government needs to implement an economic emergency and it should start by reducing spending on its luxuries and introducing public and business-friendly tax policies”.

He comments: “If the cow you’re milking does not provide you milk as per your demand, you need to provide it additional fodder by fixing its environment.” 

Although the government has projects in place, like the Benazir Income Support Programme (BISP), to provide relief to lower-income groups, the volume and effectiveness of it are undetermined, and it faces allegations of corruption and malpractices. With the role of BISP acknowledged by organisations like the World Bank and economic think tanks in alleviating poverty and reducing inequality, there are problems with its access to eligible families.

Nasreen, who works as housekeeping staff at a media company, says her employers only recently started giving her minimum wage after she, along with other colleagues, threatened to leave if her salary, Rs25,000, was not increased.

Having to work for 10 to 11 hours each day, it is difficult for her to make ends meet, and she looks forward to obtaining BISP support. “I did apply for it before but did not receive anything. However, I know some people who got it because they went through a local political representative in their locality.”

By focusing on the stories of individuals like Abbas, Khurram, and Nasreen, and including expert insights and historical context, it seems important that increasing wages is crucial for economic growth and stability in Pakistan. The stakeholders, especially the public and trade unionists, demand the government address these issues by implementing fair wage policies, reducing unnecessary expenditures, and ensuring that social support programs reach those in need.

For the year 2023-24, the updated poverty statistics from the World Bank indicate a poverty rate of 40.1% in Pakistan, with approximately seven million more Pakistanis falling below the poverty line in recent years due to economic shocks such as the 2022 floods and the COVID-19 pandemic.

This warrants the urgency of breaking the stone in which the wages are set and carving pro-poor economic policies from it to save the most vulnerable populations from fading into oblivion. Otherwise, the yawning socioeconomic divide will widen into a chasm with the rich on one side and the abject poor on the other with other classes in between. It will first limit and then completely deny access to essential services. And the worst-case scenario would look a lot like a fictional dystopian poor-ocalypse.

Sustainable growth will remain a pipedream if it is not made sure that people have the means to meet their basic needs, which in turn will give rise to an economy that as equitable as it is stable. Thus, inflation-adjusted wages that are rational, fulfilling, and justified will not only breathe new life into the livelihoods but also spur panoptic economic activity, engendering a positive feedback loop for the good of the country. As the budget for the next fiscal year approaches, it's time for a much-needed wage reform.

The writer is an interactive media journalist, specialises in labor policies and globalization. He is currently pursuing a degree at Internationale Filmschule Köln, Germany. He tweets @zubairrashraf

Graphics and visualisations by Afreen Mirza. 

Header image of labourers along with their tools sitting on roadside waiting for clients to be hired for work at Latifabad, Hyderabad is taken from APP.