Kazakhstan’s long labor strike: Three misunderstood issues

Is “equal work for equal pay” really the question?


The oil-workers’ strike in west Kazakhstan has persisted for months partly because some underlying disputes are complex. Here’s a look at three.

Taxes. Ostensibly, the firms facing the strike pay the income taxes of their workers. Some observers may think that this reflects the good will of the employer and should elicit the same from employees.

But what matters is who, in the end, really pays the tax. It could fall on any of the three groups in the oil industry – workers, employers or consumers – or on some combination of them.

For example, suppose that consumers are willing to pay almost any price for oil. Then the firm can pass on to them the cost of the tax by raising oil prices without worrying that they will buy less oil than before. In that case, the tax will not reduce wages or profits.

Or suppose that workers in the area are willing to accept virtually any wage, because they cannot find work elsewhere. Then the firm can pass on to them the tax by cutting wages. Oil prices won’t rise, and oil profits won’t fall.

In short, the tax is paid in the end by those who consent to pay it.

Who really pays the personal income tax in Kazakhstan’s oil industry? That question can’t be answered off the cuff. Oil firms are dominant employers in Mangistau Oblast, so they may be able to compel workers to pay the tax in the form of a wage cut. But consumers of Kazakhstani oil may be insensitive to the price, too -- if much of the oil is bought under contract (not on the spot market, where Kazakhstan would have to compete with other countries selling oil); and if the contract permits price increases. Finally, owners of the oil firms may be sensitive to reductions in profit, because they can invest their money elsewhere. In that event, they will not accept the tax in the form of a haircut.

The point is this: That employers initially agree to pay labor taxes need not mean that they will actually pay them in the end.

Likewise, the pension contribution that the employer agreed to pay may actually fall on someone else.

The cost of subsistence. Kazakhstan’s minimum wage is proportional to the amount that a worker needs just to survive, notes an analyst. “Unfortunately, the subsistence minimum does not meet international standards: The percent share of a food basket included in the subsistence minimum compared to non-food products is 60:40 instead of 30:70.” So, the government should double the subsistence minimum – and it should raise the minimum wage accordingly, he contends.

This argument raises two issues – one conceptual, the other mathematical. Let’s take them in turn.

In the West, governments often define poverty as an income that falls below the amount that the household needs to subsist indefinitely. This amount is called the “poverty line.” To determine it, the U.S. government usually estimates: The cost of the cheapest nutritious food-basket; the share of income that a typical household spends on food; and finally the income at which the household would spend this share on the cheapest food-basket. For example, suppose that this food-basket for a family would cost $1,000 a year – and that the typical family spends one-third of its income on food (as Mollie Orshansky estimated when designing the U.S. poverty line in the 1960s). Then the poverty line for families is $3,000 (see the Notes for the arithmetic).

The share of income spent on food is not set in concrete. As the household’s income increases, its spending on food does not rise as quickly, since our stomachs won’t accommodate an indefinite amount of food. The food share of income falls as household income rises – a phenomenon observed so often that economists have come to call it Engel’s Law, in honor of the 19th-century statistician who formulated it.

Thus, in a rich country, the typical household spends a smaller share of its income on food than does a household in a poor country. Astana should probably estimate the food share of income based on statistics for Kazakhstan, not on those for richer or poorer countries.

As the food share of income falls, the poverty line rises, since even a poor household should be able now to buy proportionally more non-food products than before. For example, suppose that the food share of income is now one-fourth rather than one-third. Also suppose, for simplicity, that the food basket still costs $1,000. Then the poverty line will rise from $3,000 to $4,000. If the minimum wage is proportional to the poverty line, then it too will rise by a third.

Were the government to adopt the analyst’s recommendation of a food share of income of 60%, then the poverty line would fall – from $3,000 to $1,667, given a $1,000 food-basket. The minimum wage would also fall.

Hazard pay. In dangerous industries like mining, the government requires what is effectively a higher minimum wage than usual. A typical multiplier is 1.8. “The value of the [Minimum Standard of Pay, which is basically the minimum wage for a particular industry] for all the companies in all the industries should be the same,” argues an analyst. “Otherwise, the principle of social justice as well as the principle of equal pay for equal work will be violated.”

What concerns the worker is not just pay but also his working conditions. Relative preferences over pay and safety differ from one worker to another. Some workers are willing to take risks in exchange for higher pay; others would rather have more safety than more pay. Requiring all firms to pay the same wage for the same kind of work, regardless of the risk that the worker runs at particular firms, would prevent the sort of pay-for-risk tradeoffs that would benefit workers.

People sometimes ask: Why not give the worker high pay and perfect working conditions? The reason is that safety costs. In a competitive industry, the firm doesn’t make much money – its rivals force it to cut its prices – and so it can’t earmark profits to pay for more safety; there are no profits to earmark.  (A happier prospect is that additional safety may enable the worker to produce more and thus pay for itself.)  The worker may have to finance more safety out of his back pocket. It should be up to him to decide whether he’d like to pay for more safety; the government should not force him to do so by prohibiting any wage that is not identical to those paid by other firms.

Anyway, the issue here is not really “equal pay for equal work.” It's market power. When one firm dominates hiring in the region, then it may ride roughshod over the preferences of workers concerning safety and pay. Because the worker cannot simply walk across the street for a new job, the firm can force him to accept a wage that is well below the actual value that he adds to the firm. The firm thus collects a profit from his labor that could indeed pay for more safety.

By mediating labor disputes impartially, the government might be able to compel this firm to take account of the worker’s preference for safety. When the government consistently sides instead with the dominant employer, then the worker may feel that he must “vote,” so to speak, with either his voice or his feet.

In particular, mediators should ensure that employees as well as employers are well-informed about workplace risks so that they can negotiate sensibly.  And mediators should determine whether the wage offered to an additional worker is well below the value of her work.  This would indicate that the firm owns the local labor market, since evidently the worker cannot get a better offer from a competitor.  -- Leon Taylor tayloralmaty@gmail.com


Notes

1.Let s denote the income share spent on food; Y, household income; and C, the cost of the cheapest nutritious food-basket. Then the poverty line is that value of Y – call it Y* -- that satisfies sY = C. Solving, Y* = C/s. In our example above, s is 1/3 and C is $1,000. So, Y* = $1,000/(1/3)) = $3,000.


Good reading

Kanat Berentaev. The strike of oil industry workers: analysis of reasons and ways of solving the situation (short thesis). algadvk.kz

Ronald G. Ehrenberg and Robert S. Smith. Modern labor economics: Theory and public policy. Ninth edition. Boston: Pearson Education. 2006.  Discusses the tradeoff between wages and safety.

Gordon M. Fisher. An Overview of (Unofficial) Poverty Lines in the United States from 1904 to 1965. United States Bureau of the Census. Online.

Gordon M. Fisher. Mollie Orshansky: Author of the Poverty Thresholds. Amstat News. September 2008. Pages 15-18. Online.

Washington University, St. Louis. (Ernst) Engel's Law & Curves. http://faculty.washington.edu/krumme/resources/engel.html.