A Costly Recipe: The Latest Proposed Minimum Wage and Changes

The government’s recent decision to raise the minimum wage for 2024 and introduce stricter labor regulations has been celebrated as a step toward improving worker welfare. In a previous column,  I examined how these changes were structured.  While these measures may be “sold” as commendable, their broader implications raise critical concerns about inflation, the sustainability of businesses, and overall economic stability.

This shift is not new. In December 2023, I analyzed wage increases for 2023 and 2024, highlighting how consecutive hikes drove up business costs and exacerbated inflationary pressures. With 2025 likely to bring another increase, the pattern becomes even clearer: a growing strain on businesses and consumers, underscoring the need for thoughtful, balanced policymaking.

Context: A Pattern of Successive Wage Increases

Let’s first revisit the data:

• 2023: Minimum wage increased by 4.3%, reaching Afl. 1,893.41 per month.
• 2024: Another increase of 4.9%, raising the wage to Afl. 1,986.20 per month. See my column on this hike.
• 2025 (Projected): Early estimates suggest another 4-5% increase, potentially exceeding Afl. 2,085 per month.

These increases also push the overtime pay threshold - set at 2.5 times the minimum wage. Consider the progression:

• 2023 Threshold: Afl. 4,733.53
• 2024 Threshold: Afl. 4,965.50
• 2025 Threshold (Projected): Likely above Afl. 5,200

For hospitality, retail, and tourism industries, where overtime pay is common, these adjustments significantly raise labor costs, further burdening businesses.

Inflationary Pressures and Labor Costs

The compounding effects of these wage hikes, combined with broader economic challenges, paint a concerning picture:

1. Labor Shortages Already Drive Up Costs Employers already struggling with labor shortages are forced to offer higher wages to attract and retain workers. Ask business owners, and they’ll tell you how difficult it has become to find workers.. This competitive wage inflation amplifies costs, especially for SMEs.
2. Inflationary Feedback Loop Rising wages and overtime thresholds leave businesses with few options but to raise prices for goods and services. These cost increases, in turn, drive inflation, reducing the purchasing power of all workers—including those who’ve just received wage increases.
3. Sector-Specific Challenges Labor-intensive industries such as tourism and retail, which form the backbone of our economy, are particularly vulnerable. Many businesses operate on thin profit margins and must reduce services, cut staff, or raise prices further to absorb the rising costs.

Regulatory Changes: More Complexity, Higher Costs

The proposed changes to labor regulations, particularly those affecting working hours, add another layer of difficulty for employers:

• Operational Challenges: Businesses in sectors with variable schedules, such as hospitality and healthcare, may need to hire more staff to comply with stricter regulations—or face significantly higher overtime costs In a tight labor market, these changes compound existing pressures.
• Administrative Burdens: Compliance with new regulations often requires businesses to invest in additional HR resources, legal support, or new systems for managing payroll and schedules. These costs disproportionately impact businesses.
• Reduced Job Creation: Rising costs and regulatory complexities may deter businesses from expanding or hiring, exacerbating unemployment risks in certain sectors.

Who Ultimately Pays the Price?

While these measures aim to benefit workers, the reality is that their costs ripple across the entire economy. Businesses will pass on higher costs through increased prices for goods and services, contributing to a higher cost of living. Inflation will offset wage gains, and job opportunities may shrink as businesses reduce hiring or hours. Our businesses need help balancing compliance, profitability, and competitiveness. Like one business owner told me:

“Doing business just isn’t fun anymore”

Another one told me:

“The government cuts down spending on infrastructure, health, and education but has no problem increasing costs for the private sector.”

To explain further, let me use the following example. As of January 1st, 2025 a business that I know will be exposed to at least Afl. 200,000 in extra banking fees alone because of the increase imposed by the banks on debit card use. If the same company has 50 employees, all earning below Afl. 5,000, it could see its labor costs rise by approximately Afl. 54,067 annually (or Afl. 4,505 per month) starting January 1, 2025. This represents a significant increase that could strain operations, particularly for businesses with tight profit margins. Now if this company asked the government for a tax break for this company for Afl. 300,000.-- to absorb all this, they would call the company crazy and all kinds of names, but the same government has no problem saddling this company with an extra Afl. 300 in expenses overnight.

AFTA Are Thou There? Adding to these challenges is the recent rise in debit card fees, further straining businesses already grappling with rising costs. The Aruba Financial Transaction Authority (AFTA) must intervene to address this issue or risk being seen as complicit in undermining the financial stability of local businesses.  Allowing such fee hikes during an economically sensitive time not only adds pressure on businesses but also undermines AFTA's credibility as a fair and reliable regulator.

A Comprehensive Plan for Managing Change

A comprehensive business support plan is essential to address these challenges and create a more balanced approach to wage policy. To help businesses absorb rising labor costs, the government should introduce reductions in payroll and corporate taxes, as well as taxes on fuel and diesel.

Additionally, targeted support for employers in the most affected sectors - hospitality, tourism, and retailv - can ease the compliance burden. The Aruba Financial Transaction Authority must step in to regulate or cap rising debit card fees, which unfairly burden businesses. The question remains: Will the AFTA have the courage and spine to stand against the banks or the Mastercards/VISAs? Or choose to protect their reputation by not risking any intervention? Will AFTA foster a more stable financial environment and restore its credibility as a fair and reliable regulatory body by regulating or capping these fee hikes? 

We finally have an Ombudsman, but on these issues, it seems unlikely they’ll step in to defend the people anytime soon.

Thus, we can ask ourselves, what good are these institutions if they don’t act when danger is imminent and instead hide in their ivory towers?

Perhaps, collaborative policymaking that brings together employers, unions, and economists can ensure wage policies balance worker welfare with economic realities. We have the talent locally available, but the government spends the budget on hiring party loyalists, regardless of their skillset. Open dialogue allows for real-world insights to guide decisions, minimizing unintended consequences.

Looking Ahead to 2025 and Beyond

With 2025 likely to bring another minimum wage increase, it’s clear that rising labor costs will continue to be a significant concern. Without a thoughtful, balanced approach, these election-driven policies risk triggering an inflationary spiral that defeats their purpose. Policymakers can chart a path that benefits everyone by prioritizing sustainable growth and supporting businesses and workers.

Closing Thoughts

The government’s recent actions reflect a genuine effort to improve worker livelihoods, but they come with significant risks if not managed carefully. Thoughtful, data-driven solutions - not political opportunism - are essential to ensure these policies support workers without undermining economic stability

For more insights on labor policy and economic trends, visit www.lincolngomez.com. See you next week!