Bolivia raises minimum wage by 20%President Evo Morales agreed to meet the unions' demands to raise the minimum salary by 20%Bolivia will raise the minimum wage by 20%, President Evo Morales announced on Monday.Following talks with leaders from Bolivia's main trade union federation, President Morales also said that the basic salary would go up by 10%.The increase is well above inflation, which was 6.5% in 2013.The move has been welcomed by the trade unions but harshly criticised by the employers' federation, who said they had been bypassed in the negotiations.'Bitter talks'The minimum salary for public and private sector workers will go up from 1,200 bolivianos ($175; 100) to 1,488 bolivianos."There has been economic growth, and that's why we have decided to raise the minimum salary by 20%," President Morales said.Bolivian Central Labour Union leader Juan Carlos Trujillo said the negotiations had been "very bitter, icy and heavy" but that in the end, the two sides had reached an agreement.He said he had asked the executive to recognise "the need and the obligation to create a salary structure which is based on the country's growth and the recognition that the riches of Bolivia have to be shared between the haves and the have-nots in equal measure".The Confederation of Private Entrepreneurs (CEPB) rejected the increase, saying the workers would end up paying for it through increased taxes.The director of Bolivia's largest employers' organisation, Daniel Sanchez, said the decision had been based on politics rather than on sound economic reasons.He suggested President Morales was trying to curry favour with the trade unions ahead of October's presidential elections, in which he will be running for re-election.Bolivia's gross domestic product tripled to $27bn in 2012 since Mr Morales took office in January 2006, according to World Bank figures.President Morales has set a goal of 5.2% growth in GDP for 2014.

The decision of increasing the minimum salary to a 20 % has as effect that no worker can earn less than that salary, so that the increase of the minimum salary while it benefits the working class as they can earn more income, on the other hand companies will pay more if they decide to hire new employees, because they would have to pay a greater or the same amount of that salary. As the employers have no incentive to make new contracts because of the raise in the minimum salary this means for the company a raise in the costs of production.The increase of the minimum salary is because there has not been an economic growth in the words of the president Evo Morales. If we interpret these words of the president we can say that the companies did not increase their production due to the small quantity of demand and what is intended in his words is to increase the income of the families to also increase the demand and thus to encourage the companies to have a larger volume of production.According to the INE (national statistical institute) the rate of inflation in 2013 was 6.5% and the increase in the minimum salary is 13.5% above the inflation rate, which aims to reduce the negative economic effects of rising of the prices by increasing the purchasing power of money based on a larger volume of the same in this case it would compensate the rising of prices, leveling this way the national economy. The inflation rate calculated by the INE is actually different from the inflation rate of the working class that has a higher rate and the increase in the minimum salary would not really offset the existing rate of inflation.Companies may decide not to hire new workers with the minimum salary but still they would have to level the salaries to workers who were with the previous minimum wage which would increase the production costs. On the other hand an overall increase of 10% on the basic salary of workers is being determined, a situation that would cause a disequilibrium in the productive enterprises because if there is no economic growth is easy to deduce that the corporate profits were minimal or absent and the new increase would generate a decrease in company profits , in some cases, and in others the temporary reduction or suspension of production because they would have to lay off workers to offset production costs and which would cause a decrease in the amount product which would result in the immediate future scarcity of goods or services , which would lead to a rise in prices that could further exacerbate inflation .The rise in price of a particular good makes the total volume of taxes even higher, which again would reduce the purchasing power of money or real value of money, in other words the peoples income will suffer a real decline which is manifested in a decrease in the quantity of demand.The increase in wages also determines the price of raw materials. The increase of salaries makes the price of raw materials also to increase, which means that the costs of production have risen, which generates a decrease in the quantity of production giving a displacement level of production or supply of goods as it is shown on the graph below.

Shirts Market

Before increasing the salaries the equilibrium pricee was in Q P, with the rising price of the factors of production, the quantity produced will decrease so that the supply curve would have a negative shift generating a new point equlibrium in Q1 P1 because of a decrease of the production scarcity of the product is generated which causes prices to rise up to P1 there will be a negative movement along the demand curve to Q1