Will Increasing Workers' Wages Enhance Purchasing Power?

With the approval of the Supreme Labor Council of Iran, the minimum wage for workers was increased by about 37% for the solar year 1398. Accordingly, the official minimum wage for workers next year will be 1,517,000 tomans. For workers with one child, the wage is set at 2 million tomans, and for those with two or more children, it is 2,100,000 tomans. It is important to distinguish between the value of this wage in terms of 'current or nominal value' and 'purchasing power.' The pressing question is how much the purchasing power resulting from this 'official and nominal' wage increase will actually be in daily life. Will this amount's purchasing power remain stable and genuinely elevate the living standards of the workforce? It should be noted that the purchasing power of wages in a society facing high inflation is not the same as its current or nominal value. Various methods exist to assess the purchasing power of wages and income against market rates. One of the simplest methods is converting wages into the free dollar rate. Utilizing such a method—in the absence of accurate and reliable inflation statistics—allows for the evaluation of the international purchasing power of wages. The free dollar rate often correlates with inflation rates. The accompanying chart displays the international purchasing power of the minimum official wage for workers against the average free dollar rate. The chart shows that the international purchasing power of official minimum wages in Iran has fluctuated significantly against the average free dollar rate since the revolution. This uncertainty contributes to household anxiety, as families are unsure how much purchasing power they will have in the new year and how to manage their budgets. The economic variable of the official wage's purchasing power at market prices or fixed prices is ultimately determined by the dollar rate. Although importers of goods and services may use government currency, the pricing of goods is ultimately based on the floating market currency rate. As purchasing power increases, the income derived from wages enhances the freedom to choose goods and services. Conversely, when purchasing power decreases, families relying on selling their labor fall into 'poverty,' thereby losing their freedom of choice. In this context, quality of life also deteriorates with reduced freedom to choose goods and services. Therefore, a decrease in purchasing power has economic implications but also signifies a reduction in the freedom to choose goods and services—or, in other words, an increase in the constraints of life in other dimensions, including social and cultural aspects. The decline in quality of life results from the reduction and fluctuation of household budgets in microeconomic terms. However, the issue does not end here. With increasing household budget deficits and declining purchasing power, national savings also decrease, leading to reduced household investment in areas such as housing or even education and health. The ultimate effect of this is a decrease in overall demand, which is keenly felt by sellers of goods and services, leading to reduced production capacity and deepening economic recession. Why does nominal wage increase not equate to increased purchasing power? It is essential to remember that the manner of wage increases depends on the sources of this increase. Is the source of this increase economic growth, or is it derived from the distribution of oil revenues, borrowing from the central bank, budget deficits, and increased public liquidity? Household purchasing power can only increase when macroeconomic variables such as inflation, economic growth, national currency value, and employment rates rise, while simultaneously, government welfare budget expenditures do not decrease. Otherwise, wage increases are nominal and will not improve real welfare and livelihood. Sometimes, the government increases wages by borrowing from the central bank, which leads to a vicious cycle of inflation. Other times, the government raises its services' prices to fund wage increases, meaning that one group's wage increase comes at the expense of another group's citizens. Additionally, the government may cover wage increases by reducing public welfare services. Such actions do not enhance household welfare value but ultimately reduce it. In the current situation, where government revenues are declining, inflation rates are high, the national currency value is plummeting, and employment is decreasing, merely increasing wages cannot enhance the welfare basket of households. According to various estimates from international organizations and domestic institutions such as the Research Center of the Parliament, Iran's outward and inward-looking economy is expected to experience deeper recession in the new solar year. Simultaneously, inflation rates will also rise. In the upcoming recession, which is accompanied by inflation, a contraction of the entire Iranian economy at constant prices seems natural. In the wage and inflation race, ultimately both groups in the labor market—workers and employers—will lose. As the purchasing power of workers decreases at constant prices, employers will not be able to pay the increased high wage rates, leading to workforce adjustments, unemployment, and the closure of workshops, along with delays in wage payments being expected.