The issue of a legal minimum wage in Nicaragua has been a subject of much debate of late in the light of a working paper published by Tim H. Grindling and Katherine Terrell. But what does ‘minimum wage’ actually mean and why is it so important?

The definition of a minimum wage is the lowest hourly, daily, or monthly wage that an employer is allowed to pay. There is a very large chasm of opinion amongst experts as to whether (or not) a minimum wage is capable of improving the standard of living conditions in poorer countries, including Nicaragua.

People who advocate a higher minimum wage in Nicaragua believe that it will help to increase that current standard of living and reduce the grinding poverty still endemic in many rural and mountainous areas of the country. Those who are against an increase in the minimum wage in Nicaragua think that if it is raised high enough to be effective it will increase levels of unemployment amongst some sectors of the workforce.

Poverty and the effects of the current economic recession are mostly likely to be seen in rural areas of Nicaragua. Research has shown that indigenous peoples, women and children in Nicaragua are most affected by poverty as they are the least likely section of the population to be paid a fair wage and also less likely to receive any social protection.

More than 40% of the population live in rural areas of Nicaragua. Unemployment rates are generally higher in urban areas, but this is consistent with findings that show people living in rural areas cannot afford to be unemployed, and therefore will take any kind of employment no matter how poorly paid so they can put food on the table.

In rural areas of Nicaragua, agriculture is the main employer. Unfortunately, most agricultural employment is poorly paid and seasonal, which only exacerbates levels of poverty in these areas. Child labour is also very common in rural areas of the country and children can rarely expect to be paid a fair wage.

The findings of the Grindling and Terrell working paper on the impact of minimum wages on wages, work and poverty on Nicaragua are interesting. Their study has looked at the effect of changes made to the legal minimum wage on wages and employment, transitions of workers between jobs and employment status, and transitions in and out of poverty.

Results showed that workers whose wages were already close to the minimum wage were most affected and an increase in the minimum wage increased unemployment due to reduced hiring. On the plus side, increasing the minimum wage is more likely to reduce levels of poverty, especially if the main breadwinner has their wages increased.

The statutory minimum wages in Nicaragua are decided by tripartite negotiations involving the government, business, and labor. The result of such negotiations must then be approved by the National Assembly. The most recent negotiations revealed that in six out of ten sectors the average wage was above the minimum wage and in general the minimum wage for employees was only enforced in the formal sector. It was also discovered that the national statutory minimum wage was unable to provide a decent standard of living for workers and their families, and in every sector, the minimum wage was below the amount needed.

Faced with such compelling evidence that increasing the minimum wage in Nicaragua is necessary to reduce poverty in the country, an annual adjustment of 13% to the minimum wage was agreed in February by a special commission. The increase will be introduced in two stages. The first increase of 7% took place in February 16, 2011 and the second increase of 6% will be introduced in August 16, 2011.

This table is what is posted as actual minimum wage in the “Ministerio de Trabajo” in Nicaragua.

The above table shows the monthly salary per Business Sector in Cordobas (NIO). One US Dollar equals about 22 Cordobas, you can click here to see the most current exchange rate.

The proposed increases to the minimum wage in Nicaragua are based on what is termed the Canasta Basica. The Canasta Basica is defined by the Mexican Central Bank as the cost of basic food and services for the average citizen and this is based on eighty essential items.

In very poor countries like Nicaragua, it is often the case that the cost of living is actually more than the earnings generated from low paying jobs, which only exacerbates the levels of poverty amongst vulnerable sectors of the population. Raising the minimum wage in Nicaragua will help more families living in abject poverty to be able to afford basic food stuff and services, and thus their standard of living will be improved.

The Instituto Nacional de Información de Desarrollo (INIDE) in Nicaragua conducts research and provides statistical evidence to support the decision making bodies in their attempt to improve the working and living conditions of the population of Nicaragua. They carry out censuses and surveys and disseminate the data through regular and timely publications. Their work is invaluable in helping the government to implement economic reforms such as a minimum wage.