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Pen on paper about new increase in national minimum wage: from official arguments to real effects

de Marin Pana , 29.10.2018

The Council of Economic Programming (CPE), a seven-member body established one year ago having the same chairman as the National Commission for Strategy and Prognosis (CNSP), proposed the increase in the minimum wage as of November 1, from RON 1,900 to RON 2,080 and presented a series of arguments in this respect.

If this measure was adopted, a minimum value of RON 2,350 lei would also be added for people with higher education or those without higher education who have a work seniority of more than 15 years.

We briefly present the motivation displayed on CNSP’s website with the effects that would be spread into the economy:

  • The increase in the national minimum wage is necessary, considering the acute shortage of workforce we are facing. At the same time, that would reduce social inequalities (we rank 7th in the EU from this point of view by Gini coefficient) and would increase youth employment rate by 20%, corresponding to a 10% increase, if econometric data for 2000-2018 maintained. Theoretically valid arguments.
  • The idea is to divide more equitably the benefits of the economic growth and allow a more smooth transition to a higher income category. With a 13.3% poverty risk for full-time employees (only 11.2% in Greece) and a 61.1% poverty risk for people working part-time (at a far distance from Bulgaria, 35.6%), last year we ranked first in the EU.
  • The argument that in Romania only 36% of GDP is allocated to the remuneration of employees and 55% to the remuneration of capital (the remainder, to indirect taxes minus subsidies) is also valid, especially if we consider the increase to 38% in 2019 and the reaching of the 40% threshold in 2021. Best references are the EU average of 47.3% and Poland, with 38.6%.
  • There is also a chart showing us as clear European champions (twice the result of the next country on in the ranking) both by the increase in the hourly work productivity (39.2%) and the increase in productivity per employed person (31.9%) between 2012 and 2017. Latvia comes first behind us, with less than 20% and 14%, respectively. To be noted, in August 2012, we were though below 120% by purchasing power compared to October 1990 reference (the last month before price liberalization) and in August 2018 we went up to over 190%, with an advance of about 60%, well above the labour productivity increase.
  • The increase in the national minimum wage would have a positive impact estimated at 0.15% on the economic growth of the current year and at 0.8% in 2019. The idea would be that “increasing the minimum wage stimulates consumption and the aggregate demand, and implicitly the economic growth”. Obviously, but the question is whether we should stimulate economic growth beyond the potential.
  • Based on the econometric analysis, increasing the national minimum wage leads to the growth of the net wage, and a 10% change in the net wage could influence the inflation rate by 0.5%, with a gap of about a quarter. We have simplified the CPE assertion, which considers this influence to be insignificant. However, related to a target of 2.5% plus/minus 1%, half a percentage points counts.
  • Lastly, it is launched the idea of maintaining a minimum ratio of 45% between the national gross minimum wage and the national gross average wage (SMB), along with a planning that would meet this criterion. On October 1, 2019, SMB would increase to RON 2,250 and on October 1, 2020, it would reach RON 2,430, by an increase pace of about eight percentage points in both cases. The annual SMB average will complicate, of course, with nine months at a lower level and three months at an increased level, around the elections date. For 2019, SMB would be at an average of RON 2,122 (45.6% of the gross average salary projected at RON 4,657), and it would reach RON 2,295 in 2020 (45.9% of the gross average salary projected at RON 5,002).

Real effects: Increase obtained by employees, below the increase in the state budget

More up to date, it remains to be discussed whether about one hundred RON in extra money obtained per month for the national minimum wage would sensitively change the situation we are in.

Meaning:

to what extent would that increase the employment of young people, equalize living standards and increase the capacity of the budget to fall within the 3% of GDP threshold?

*

  • Effects of adjusting the national minimum wage as of November 1, 2018
  • (CNSP’s proposal, people with no high education and less the 15 years of seniority, RON)
  • National gross minimum wage (RON)
  • National net minimum wage (RON)
  • Taxes paid to state budget (RON)
  • Costs for the company (RON)

*

We can see that, somewhat surprisingly for the so-called flat tax rate, at a 9.5% increase in the national gross minimum wage, a smaller increase in the net payment (8.7%) would be obtained, but an amount by 10.6% higher paid to the state budget.

That could count in terms of the increase in revenue collection in the two months remaining from 2018 (with the observation that wages for December will be paid in January).

For companies, the cost of a job paid at the national minimum wage level would suddenly increase at the end of the year by RON 184 per month or RON 368 lei overall. Money that was not planned in the initial budget because they had no way of knowing what measures would be taken and they have the habit to draft budgets based on the calendar year rather than the electoral calendar.

The only good part is that next year they might know what labour cost they would consider. Unless the economic policy would also adjust.

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Publicat la data de 29.10.2018

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