Proposal

INESS proposes to lower the minimum wage to € 1 or to a level which would minimise its influence on the labour market, and to introduce a social contributions deduction which would increase the net salaries of low-income employees, preserve their social protection standard and promote job creation for low-qualified workers and the unemployed.

An alternative proposal focuses on eliminating the negative effects of the minimum wage on the most affected groups and regions. In case of political impossibility of lowering the minimum wage to € 1, we propose to suspend the minimum wage in regions with unemployment rate of over 10% and for people of the age under 30.

The Ministry of Labour proposes a minimum wage increase, which will decrease job creation

After the unsuccessful negotiations between the Slovak Labour Union and Employers’ Union, the Ministry of Labour suggested an increase in the minimum wage equal to the average wage growth last year, which was 2.5 %. This figure, however, is not final and the government may eventually approve a higher growth of the minimum wage. Presented objective of increasing the minimum wage is elimination of poverty and improvement of social standard of the working class.

At this occasion, INESS releases a publication entitled ”Minimum wage  – an effective tool to increase unemployment”, which deals with the conclusions of long-term research on minimum wage’s impact on the labour market, as well as with analysis of Slovak data.

Experience shows that the effect of the minimum wage is often counterproductive and it does not fulfil the objectives originally intended by its advocates. The conclusions of our long-term research are rather unambiguous.

Minimum wage:

• increases the unemployment rate. The increase is getting higher with a higher difference between the minimum wage and the market wage in a given industry or region. The increase in unemployment is particularly significant among young people.

• harms mostly the low-income and low-qualified groups, i.e. the groups it actually intends to protect. The increase in one group’s wages leads to redundancies in another group of workers. It also causes the growth of shadow economy.

• does not decrease poverty indiscriminately across the board, but selectively. Increases in the minimum wage lower employers’ demand for work and make it more and more difficult for the unemployed people to find a new job. More than half of all the unemployed people in Slovakia are low-skilled or have been without a job for more than a year.

Myths about minimum wage persist also in Slovakia. This is also due to the fact that the current discussion about minimum wage increase cannot be characterised as scientific or economic, but purely political instead. By analysing Slovak data provided by the Social Insurance Agency and the Statistical Office, we have come to the following conclusions.

Minimum wage in Slovakia:

• directly affects more than 100,000 employees, i.e. more than 6% of employed people, and more than 300,000 unemployed people. From the beginning of 2013, tens of thousands of contracted workers also belong to the group of employees to whom the minimum hourly wage applies.

• has been growing faster than the median wage in every self-governing region. Thus it constitutes an increasingly higher burden for the economy and for the labour market in particular.

• does not take into account differences between regions. The median wage in Banská Bystrica Region and Prešov Region is more than €200 lower than the median wage in Bratislava Region. The minimum wage thus distorts the labour market in the poorer regions more than in the richer ones. It is a significant contributing factor for the 20 % unemployment rate in the regions of Banská Bystrica and Prešov.

It is interesting to consider examples from abroad as well. It is not true that not having a minimum wage pertains only to the 3rd world countries. Also countries such as Sweden, Switzerland, or even Germany do not have a centrally determined minimum wage. They prefer collective agreements in individual industries, which often grant employees better conditions than a law on minimum wage would.

It is important to note that 8 million Germans work for less than the French minimum wage. This constitutes a fifth of the German workforce. The unemployment rate in France is 11%, while in Germany it is less than 5.5%. This is one of the effects when one country prefers social security while another one prefers higher employment. Eliminating administrative barriers in employment for the purpose of increasing job creation highly depends on the government’s political courage.

The alternative to a minimum wage

Besides our critique of the concept of minimum wage, INESS has elaborated an alternative proposal for increasing the social standard of the employed while supporting job creation at the same time: it is replacement of the minimum wage with a social contributions deduction for low-income employees.

In practice, this would mean lowering the social contributions burden for employees with a gross income lower than € 555 (i.e. less than € 750 of total labour costs). Today, it is the government who takes 36 % of each euro of the labour cost of the workers (even the ones on the minimum wage) by means of social and health contributions. The entitlements from the social system resulting from paying social contributions would be preserved at today’s level also for the employees who would benefit from the social contributions deduction.

A person with a gross income of € 337.7 (the minimum wage) now has a net income of only € 292 at the end of the month, even though the minimum labour costs amount to € 456 (including social contributions paid by employer). The difference between what they get (€ 292) and what they could get (€ 456) remains in the contributions scheme.

After introducing the social contributions deduction at the level we propose, the net salary would rise from € 292 to € 348 if the labour costs (€ 456) of the employee were maintained at the same level. If an employee and an employer shared the social contributions deduction equally (i.e. the employer would lower the labour costs by the same amount as the employee’s net salary would increase), the employee’s net salary would rise from € 292 to € 330. In contrast, Labour Union proposes to raise the minimum wage by 8 % to € 365. This would grant the employees the net income of € 315. INESS proposal is thus in every aspect more generous to both employees and employers than the proposals made by Labour Union or the Ministry of Labour.

How much will it cost?

INESS estimates a resulting shortfall in social contributions to € 370 million. However, this shortfall would immediately be reduced by a higher revenue from income taxes by more than € 40 million (reduction in social contributions would increase the tax base).

The social contributions deduction would also support the creation of tens of thousands of new jobs as it would lower the total labour costs for the employers. The Deduction would thus have a positive effect also in terms of lowering government expenses (unemployment benefits, benefits in material need) and would actually increase the tax revenues (every legally-employed person pays social contributions and taxes).

The government would have to cover the rest of the shortfall from other sources. Knowing that the government provided more than €120 million in economic stimulus last year alone and finances ineffective employment schemes for other tens of millions, there certainly are resources available to establish the proposed social contributions deduction. The Deduction would be indiscriminative and helpful to both employees and employers, with the absence of possible clientelism and corruption inevitably present in the process of providing investment stimulus and subsidies to selected employers.

Increasing the minimum wage is only a trade-off in which we exchange higher salaries for some workers for the loss of jobs of others. With this proposal, INESS has brought forward an alternative which would increase both salaries and employment.

The study on minimum wage is available in Slovak here as a PDF file.