Contractors in Dubai have agreed to increase labourers' wages by up to 20 per cent following a string of disputes at leading companies in the emirate in recent weeks.

After repeated calls from contractors for the government to impose a minimum wage, leading firms have independently decided to increase workers' wages to compensate for rising living costs and currency depreciation.

"We held a meeting because we could not get a response from the government about a minimum wage," says one leading contractor. "We assessed the rate of inflation and exchange rate fluctuations and took the decision to raise wages by 20 per cent with immediate affect."

While dealing with workers' concerns, some observers fear wage hikes could further drive up project costs as employers hand on increases to clients.

The decision follows a week-long strike by labourers working for the local Arabtec Construction. It is one of the emirate's largest contractors, with a workforce of about 30,000. Although several issues were raised by the striking workers, it is understood that their main complaint was the declining value of the UAE dirham against the Indian rupee and other currencies.

The falling value has greatly reduced the amount of money they can afford to send home.

Although protests by labourers working for smaller, less reputable contractors are a regular occurrence, the strike sent shockwaves through the industry. "It is a scary development, we are very worried," said a local contractor on the morning the strike started on 1 November. "If this can happen to Arabtec then we are all at risk. It is almost a question of who's next?"

The Arabtec dispute is not the first to affect a leading contractor in the emirate. In March 2006, labourers working for the local/UK Al-Naboodah Laing O'Rourke staged protests at the Old Town development next to the Burj Dubai.

Two months later in May, workers from the local/Belgian Bel Hasa Six Construct refused to go to work until demands for increased levels of pay were met.

"Labour disputes have been a constant problem," says another contractor working in Dubai. "If you go back one-and-a-half years you will see that most companies have been affected in some way."

In March this year, it appeared the government was prepared to step in and introduce a minimum wage.

"The ministry has embarked upon a detailed programme of research, the key deliverable of which will be a recommendation to the Council of Ministers that a framework for a minimum wage should be adopted," said Labour Minister Ali Abdullah al-Kaabi on 25 March.

"This will apply initially to the construction sector, in which many hundreds of thousands of people work, and will then be expanded to cover the entire workforce."

Despite the potential rise in labour costs, contractors generally welcomed the transparency that a minimum wage would bring, but the legislation appears to have stalled. "I don't think the government will ever approve a minimum wage," says a UK-based contractor working in Dubai. "If it does then the labour issue will become their problem not the contractors'.

"At the moment, we are the bad guys because the protests are against the employer. But if workers feel the minimum wage is too low, then the protests will be against the government, and that is something they clearly do not want to happen."

The decision to increase wages will affect contractors' operating costs in the short to medium term. However, clients will ultimately pay, as contractors will simply pass the cost on.

"For larger companies, this could cost up to AED100m ($27m) for the next few years," says the contractor. "For current projects, it will affect our margins, but we will obviously factor it into our prices for future projects. You may even see some companies raising prices even more to compensate for any losses they may suffer for ongoing work."

It is unclear whether the increase in wages will stop more disputes in the future. "There are two options," say the contractor. "One, this is the end of strikes; or two, something other than levels of pay is driving the issue. Only time will tell."

The treatment of expatriate labour employed in the construction industry has become a well-publicised issue. New York-based Human Rights Watch has published several hard-hitting reports criticising the UAE for the way it treats its workers.

In response to the criticism, UAE Vice-President, Prime Minister and ruler of Dubai Sheikh Mohammed bin Rashid al-Maktoum ordered the federal government to improve working conditions in November last year.

But despite a series of diplomatic initiatives between the Labour Ministry and labourers' home countries, and an increase in the number of inspectors, the situation for many workers does not appear to have improved.