To Save Flailing Economy, Venezuela Raises Minimum Wage: Can Wage Hikes Work When Nation Cannot Afford Its Own Currency?

In the latest attempt to bolster its flagging economy, Venezuela’s socialist government has ordered a 30 percent increase in the nation’s minimum wage, effective immediately. The increase, symbolically chosen to take effect on International Labor Day, marks the second major increase in Venezuela’s minimum wage in the last two months. In a previous attempt to boost the economy, Venezuelan President Nicolas Maduro announced a 25 percent increase in the minimum wage on March 1. Officially, this would ensure Venezuela’s workers a monthly income of $1,500 USD. However, in real economic terms, as defined by purchasing power, the latest announcement raises the average monthly wage to $50 USD.

None of this is particularly surprising — the economy of Venezuela has been experiencing almost unbridled inflation for some time. The economy, heavily dependent on oil revenues, has contracted roughly 6 percent in the past year. Dating back to the regime of the late President Hugo Chavez, Venezuela has used its oil revenue to finance a host of social programs, as well as to guarantee a certain minimum standard of living. Along with other factors, these shrinking oil revenues have sent Venezuela’s economy into a freefall.

Maduro has attempted to change his country’s reversing fortunes through a combination of wage hikes, price controls, and minimum and maximum production quotas, and currency manipulation. In danger of defaulting on its sovereign debts, and, more troubling for its economy, running out of cash, Venezuela began selling off gold reserves in 2015. Of the $15.2 billion in foreign reserves Venezuela had in hand, less than $1 billion of that was in cash, with the rest being in gold. Even with the massive selloff of its gold reserves, Venezuela retained outstanding debt of $15.8 million through the end of 2016. The looming threat of default is another drag on the flailing economy.

Untended fields

Severe shortages in goods and services have also become the norm, the result of economic policies mandating price controls and production quotas. Emblematic of the issues that beset Venezuela’s economy is the fact that government-seized fields sit idle and untilled while citizens endure long waits in line at stores that lack simple economic staples such as rice, coffee, flour, and even toilet paper. Exacerbating the shortages resulting from price and production controls are policies mandating the importation of certain goods in order to maintain artificially imposed price ceilings. How can Venezuela maintain and economy that relies on import that it cannot afford to pay for? Highlighting the absurdity of the nation’s sinking economic fortunes, the government has instituted rolling blackouts to preserve the power grid, in addition to instituting two-day workweeks for government employees, also to preserve the stressed electrical grid.

No money, more problems

Combined, these factors reduce the effectiveness of Maduro’s minimum wage increases. While the new wage of 15,051 bolivars month is technically $1,500 USD at the official exchange rate, in terms of the nation’s economic status, it is actually $50 per month in real economic terms. This is a function of obtaining goods via the black market, which at this time comprises the real economic engine of Venezuela. Further threatening the precarious state of Venezuela’s economy is an actual shortage of currency.

According to Cunliff of Fee,“The country can no longer afford the pieces of paper which represent the money it doesn’t have.” In other words, Venezuela, attempting to save its economy by printing more banknotes to keep up with spiraling price increases, cannot afford to print hard currency. Lacking the internal resources to do so, it has resorted to importing its own currency, but Venezuela is rapidly running out of money to pay for its own money.

[Photo by Spencer Platt/Getty Images]