Minimum Wage, Maximum Tragedy

Edgar Degas: Melancholy // Public domain

If we want to start talking about next year’s minimum wage increase, we first need to look to the past. As we all know, 2020 was the year of the pandemic, and that brought with it, among other things, a significant downturn in the economy, and with it a fall in labor productivity.

The private sector responded logically by reducing the growth in average wages. But not all businesses had this option. On the contrary, some businesses had to increase wages at a record rate of 11.5%. That is how much the minimum wage in Slovakia rose in 2020. This was the second largest minimum wage increase in the EU. Consequently, even in a pandemic year, politicians did not learn their lesson and approved another, high increase of 7.4% for 2021.

All this pandemic growth in the minimum wage has yet to be put into the even wider context of the last 8 years. During that time, labor productivity has risen by 21%, average wages by 46% and the minimum wage by 84%. This rapid outpacing of political marketing ahead of economic reality has shot us to the top of the EU countries in terms of the level of the minimum wage relative to the wage level of the country.

In Slovakia, the minimum wage as a share of average wages reached 52% this year. Two years ago, Slovenia reigned supreme in this comparison, with a 51% share. Even if we were to freeze the minimum wage this year, we would reach 50% next year.

In this context, the trade unionists are proposing a EUR 50 increase in the minimum wage to EUR 680 next year. That would mean a minimum wage cost of 920 euros. An employee who is cash-strapped in his job is automatically covered by the second tier of the minimum wage, and that means a minimum wage cost of EUR 1 100. This makes a long-term unemployed person with a primary education living in the east of the country de facto unemployable.

Under such conditions, he will not get the chance to stand on his own feet and find regular employment. He is dependent on black labor and social system allowances. And we have tens of thousands of such people cut off from the opportunity to participate in productive life in economically backward regions. For them, such a rapidly rising minimum wage represents a lifetime ban on work.

The negative, unintended consequences of the minimum wage are even more intense in times of economic downturn, such as we are experiencing today. And it is already visible in the figures. Despite the fact that the overall unemployment rate has been rising at a very slow rate of 0.3% for the whole of Slovakia over the last six months, people have seen localized outbreaks of unemployment in some districts.

In the 10 worst districts, more than 6 000 people have lost their jobs. It is as if the PSA PEUGEOT CITROËN car company and a handful of its suppliers had closed their plants in the poorest part of the country last semester. If that had really happened, the media would not have written about anything else for weeks. When the same thing happens in remote, backward districts with small and medium-sized businesses, nobody addresses it.

The problem of lagging regions and long-term unemployment has no easy solution. And the minimum wage is not its only cause. But we cannot turn a blind eye to the fact that such increases in the minimum wage as have taken place in Slovakia over the last eight years are one of the main brakes on economic activity in these areas.

It is therefore time for a responsible politician to emerge in Slovakia who will make an unpopular decision and stop the minimum wage rising. At least for a year. This will probably not be a sufficient condition for solving the problems in the lagging regions and the long-term unemployed, but it is certainly a necessary condition.