Our readers will know that over the past few weeks we’ve had a number of revealing articles published in La Nación about the ridiculously excessive salaries paid to Costa Rica’s government workers.
The data shows us that the average salary in government is 137% higher than the private sector.
This means that while José is earning $1,000 per month for working at his job in the private sector, someone doing the exact same job working for the government is earning $2,370 and will typically earn more ‘bonuses’, have more vacation time, more sick days and enjoy an equally absurd pension.
Public Sector Salaries and Private Salaries in Costa Rica Must Be Linked To Productivity. Free video.
In my humble opinion, wages in the public sector and in the private sector should be linked to production and the productivity of people. After all, if everyone earns the same wage, what incentive does this give good workers, who are many, if mediocre workers have the exact same benefits?
It has been suggested by some people that far from being a problem, the ridiculous salaries paid to many public officials should be duplicated by employers in the private sector.
They believe that the result of more than doubling wages nationally would magically improve the purchasing power of people.
It is impossible to increase the salaries of four out of five Costa Ricans who work in the private sector without implementing measures to increase productivity and without a complete reform of the public wage system.
Let’s take a look at a real life example:
Think of a pulpería (a small grocery store) with two workers, who earn monthly salaries of one million colones plus social security charges. Adding provisions for severance, vacation and bonuses, the risk policy work and employer contributions to the Social Security system and a few others (CCSS, the INA and FODESAF), the actual cost of an employee is increased by nearly 50% of their salary. The payroll of this grocery store now costs ¢3 million a month: ¢2 million in wages and ¢1 million in social charges.
If the grocery store works with a margin of 20% on the cost of the product, it would have to sell ¢15 million a month just to pay two salaries and social charges. That amount would not be enough for water bills, electricity and rent, and we’re not even thinking about a profit.
How many pulperías do you know who sell ¢15 million or ¢20 million a month?
This is not an isolated example: 94% of all firms in the country are composed of micro and small enterprises which would be forced into bankruptcy.
Now that wage difference between the public and private sectors are frightening!
However, we need to be careful when comparing these averages, since the composition of the workforce in the public sector differs from the private sector. The Government has a higher proportion of professionals on its payroll and of course nobody on the State payroll is planting potatoes…
In 2014, 33% of central government expenditure (excluding interest) was financed with debt. In other words, the state is borrowing to pay it’s salaries and other running costs.
In an effort to justify the indefensible, it is argued that excessive salaries paid by the public sector are beneficial to the economy because they result in higher consumption.
The pulpería in our example knows that one should never go into debt to consume because the loan would quickly become unpayable. The debt must be used as leverage; that is, to invest in economic activity with the potential to generate enough income to pay down that debt. Mere consumption does not generate income to the debtor.
In social terms, productive investment creates conditions that enable individuals to improve their productivity (and their income).
If a country borrows to improve infrastructure and invest in it’s people, namely in education and health, their citizens will be able to perform better at work and companies can achieve higher levels of efficiency, which will foster a virtuous cycle of healthy economic growth.
Companies, generating higher profits, pay more taxes and this would help pay down the debt owed by the state.
There is no choice. Wages should be linked to production and productivity of people. Doing it any other way and it puts us on track for an economic collapse.
Finally, it was the Comptroller of the University of Costa Rica who summed up the situation most accurately in their OQ-R-107 report in 2013 when it stated that: “.. excessive salaries and bonuses could cause an economic collapse if no action is taken in the short term.”
The Current Rate of Exchange: So that you know who to analyze these numbers, you should know that the Current Rate of Exchange as of the 28th July 2015 and 528 colones to 1 US dollar. You can see the current rate of exchange here.
What do you think? Let me know, I would love to hear your opinions and feedback…
Written by Scott Oliver, author of 1: How To Buy Costa Rica Real Estate Without Losing Your Camisa, 2: Costa Rica’s Guide To Making Money Offshore and 3. ¿Cómo Comprar Bienes Raíces en Costa Rica, Sin Perder Su Camisa?
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