2 februarie, 2017

1 February 2017: an important day for the labour market.

Increasing the national minimum wage from 1,250 lei to 1,450 lei will involve an annual increase of 16% of the minimum cost of labour. That will inevitably have effect in all prices of goods and services to the share of the performed labour in the cost. Simply put, if the share in the cost is 6%, the price increase will be 1% and if the share is 12% the price increase will be 2% and so on.

Of course, it could be said that not all employees have the national minimum wage and the impact would be much lower than the simplification presented above. The problem is that, according to a research conducted in March 2016 based on data from Friedrich-Ebert-Stiftung Romania foundation, the share of total employment contracts with the national minimum wage rose sharply.

Over the last five years analysed, this indicator has increased from just 8% in 2011 (relatively normal value) to a stupefying 44% last year. In these circumstances, it should not surprise anyone if in the following econometric analysis, we would find ourselves in the bizarre situation that most employment contracts in the Romanian economy to be based on the national minimum wage required by law.

In other words, if we adjusted the simplified correlation, initially presented, to reflect the reality, we would end up with an extra pressure on all prices and services somewhere around 1% annual inflation for costs of labour of only 12% of the total manufacturing costs. Not to mention the increase of the tariffs for services in which case the work is „de facto” the most expensive resource.

Besides, there would be one more fact that went unnoticed. The minimum hourly labour cost will increase not by 16%, but 18.3%, because change will be from an average work program of 169,333 hours per month at the tariff of 7.382 lei/hour to a program of 166 hours at the tariff of 8.735 lei/hour (thanks to the lawmakers who introduced new free days). If you do not remember these dull data, note that the additional increase induced by a shorter monthly work program is 14% or about one-seventh of the total.

Employer contributions for a job paid at the level of national minimum wage
National gross minimum wage Tax Jan 2015 July 2015 May 2016 Feb 2017
Social insurance (CAS)
Health social insurance (CASS)
Unemployment fund (CFS)
Leaves and allowances
Guarantee fund for outstanding claims
Accidents at work and occupational diseases
Total employer tax
Total employer cost

If we look a little further back, the situation is quite unusual, unparalleled worldwide. In a country with a negative average annual inflation in 2015 (-0.59%) and 2016 (-1.55%), the national minimum wage has been increased by almost 50% (+ 48.7%) in just two years (plus one month following the delay in establishing the government after elections).

From a strictly technical point of view, a labour productivity growth to simultaneously counterweight such wage increase and a reduction of the work program is impossible, which will certainly have an inflationary effect. Basically, there are several levers to mitigate the shock induced in the economy, the most important being the labour productivity growth. 2016 data tell us though that this growth is sublime … but totally lacking.

Obviously, for those who are fond of fairy tales with Snow White or three little pigs decreasing other production costs, the profit margin and/or mark-up against the background of increased income for employees and pensioners could work. But if these tales will not become a reality, we can expect price increases.

These price increases will drastically and inevitably affect the newly gained nominal purchasing power, decided on socio-political grounds, but for the time being without any foundation in terms of economic results. Therefore, it should be perhaps mandatory for the electoral programs to include the increases only in real, not nominal terms.

Altogether, the money sent into circulation as nominally positive wage difference cannot come, logically, but either from the labour productivity growth, as volume of work performed under the same technological conditions (otherwise, investment would be required, which cannot be made in the private sector, nor in state sector because there would be no more money for expanding the wage bill), or the price increase.

It does not take much imagination to see how the redistribution will be made at national level. The effect will be felt by all the other employees in a higher growth of inflation (and a lower purchasing power) than in the situation that the minimum wage would not have increased. With the amendment that the state employees and pensionaries will have more money to spend, following the increases announced.

There would also be the option of undeclared work and tax evasion, with the effect of a lower pension paid at some moment in the future and the lack of security benefits for sickness or accident, etc. Plus, the decrease in collecting the revenues and the additional budget gap. Probably nobody can imagine that the tax evasion will maintain the same for a minimum wage of 1,250 lei per month and for 1,450 lei per month.