Bulgaria’s New Minimum Wage Mechanism Needs Urgent Repair

minimum wage
Konstantin Savitsky (1844–1905): Repair work on the railway // Public domain

At the end of last week, the current proposal for changing the minimum wage level was published. It is interesting for several reasons, mainly because, for the first time, the new mechanism for determining the minimum wage is applied, linking it to the dynamics of the average wage.

This, in the context of high inflation and the subsequent rapid growth of wages, leads to its largest nominal increase in the last two decades, which will have much more significant effects on the labor market than usual increases. This once again emphasizes that the adopted mechanism needs adjustments and refinement.

Let’s first recall how the newly introduced mechanism works. It introduces the EC requirement to determine the minimum wage as 50% of the average wage or 60% of the median wage. In the case of Bulgaria, the first approach is chosen, taking the first two quarters of the current year and the last two of the previous one as a basis. The aim is to ensure that the data used is as up-to-date as possible when the budget procedure takes place in the autumn. The biggest weakness of this approach is its highly uneven impact on different economic activities and regions of the country.

The set level of the minimum wage with the mechanism is 933 BGN, which is 153 BGN more compared to 2023. Presented as a share of the average wage for different economic activities, significant differences become apparent. While the new minimum wage represents only 20% of the average wage in ICT and telecommunications, 30% in energy, 32% in finance and insurance, and 33% in mining, it reaches as much as 78% in the hotels and restaurants sector and 66% in agriculture (however, these shares are very close to the forecasts made by the IME back in late 2022 when the introduction of the mechanism was being discussed).

Smaller but very significant differences in the “coverage” of the minimum and average wages also exist between the regions. The capital, with its very large labor market and high average wage, is the only region where the minimum wage is below 50% of the average. In 19 regions, it is above 60%, and in Smolyan, Haskovo, Silistra, Blagoevgrad, Kyustendil, and Vidin above 70%. As with sectors, the main weakness of the current mechanism is very apparent at the regional level – although nationally the coverage of the average by the minimum wage is achieved, the convergence is much more aggressive in the least developed parts of the country and sectors.

What consequences can we expect from this? The impact assessment for the proposal’s update includes an interesting statistic, according to which the number of employees on the minimum wage in the second quarter is 442 thousand people, decreasing by 5% compared to last year. As this is a significant portion of total employment, the direct administrative increase in the incomes of this group of people – especially with over 150 leva at once – poses a serious risk of additional inflationary pressure.

This primarily concerns people in poor or near-poor households, where the wage increase will be directed towards increasing current consumption, leading to additional pressure on consumer prices, with their high growth that several consecutive governments have been struggling with. The likelihood of a sharp increase in labor costs pushing already squeezed businesses towards losses and, consequently, job losses should not be overlooked either, especially given the deteriorating economic conditions.

We should not overlook the self-employed individuals whose insurance and minimum income will inevitably be affected by the size of the minimum wage. According to the latest NSI data, the number of self-employed individuals in 2022 was 883 thousand people. Although increasing their contributions would mean a significant increase in budget revenues – and thereby, in achieving a 3% budget deficit – the sharp increase in the minimum wage will directly lead to a decrease in the disposable income of the self-employed by the amount of the new contributions.

There is no particular reason to claim that there is a direct effect in Bulgaria of increasing the minimum wage in terms of shrinking employment and increasing unemployment – with the necessary clarification, however, that the current increase is much more significant than those we have observed in the last two decades. Even less grounds do we have to expect such effects in a situation of high and almost universal labor demand and a labor shortage, where every worker is valuable.

Nevertheless, it does not seem excluded for employers and workers to agree to maintain their current relationships – and wages – but in the informal sector, where they are not required to comply with the new state requirements. This, of course, contradicts the clearly stated goal of the current government to actively combat the informal economy and off-the-books wages.

Ultimately, linking the minimum wage to the average wage creates a kind of self-sustaining growth mechanism – by necessity, raising the minimum wage leads to an increase in the average wage, which, under such an approach, would require a new increase in the minimum wage, potentially leading to their equalization. A side effect of this would be a sharp increase in inflation due to the nominal growth in workers’ incomes outpacing productivity growth.

Does this mean that applying the minimum wage mechanism is necessarily bad? Definitely not, but its activation comes at the most inappropriate moment of high inflation and rapid, yet uneven, increases in average wages. However, the main positive effect remains – taking the determination of this key threshold away from the negotiations between trade unions and employers and linking it to objective realities in the country’s economy. Nevertheless, it means that the mechanism needs adjustment and refinement.

The simplest way to do this is to use the median wage instead of the average, as is also suggested by the other option proposed by the EC. The median has a smoother dynamic and is much less susceptible to extreme values, which play a particularly significant role in Bulgaria due to the large differences between sectors and regions. The obstacle to implementing this method is that the median is calculated much less frequently than the average wage, once every four years. However, this simply means that national statistics need to take on the more constant monitoring and publication of yet another indicator.

Nonetheless, it is much more important to enrich the formula for the minimum wage to more fully reflect the state of the economy and the labor market. To achieve this, a series of indicators should be taken into account, including economic growth, changes in consumer prices, labor productivity dynamics, the balance between employment, unemployment, and the share of inactive individuals in the labor market, among others.

The list of potential indicators is long, and formulating a specific mechanism is an effort far beyond the scope of this text. However, it must provide a much more adequate and predictable growth of the minimum wage than the current one, and in case of worsening economic conditions and the risk of rising unemployment, it should not allow a significant increase.

Taking into account sectoral and regional differences is essential. Applying regional coefficients would allow for slower growth of the minimum wage in less economically developed parts of the country, avoiding additional constraints on access to the labor market for workers with the least experience and lowest skill levels. An industry-specific approach is also not inappropriate – it is not surprising that the sectors where the minimum wage is closest to the average are precisely those with the highest estimates of the size and share of the informal economy.

In conclusion, the first step has been taken with the introduction of a formal mechanism for the minimum wage. The next one, however, is its refinement and precision so that it introduces minimal distortions to the labor market, which are inevitable when applying a minimum wage regime.

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