The minimum wage mechanism needs urgent repair
Towards the end of last week, the current proposal to change the level of the minimum wage was published. It is interesting for several reasons, mainly because it is the first time that the new mechanism for determining the minimum wage is applied, which ties it to the dynamics of the average. This, in the context of high inflation and subsequent rapid wage growth, makes it the biggest nominal increase in two decades, which will have far more significant effects on the labor market than usual increases. This once again emphasizes that the adopted mechanism needs corrections and refinement.
At the end of the last year, the current offer of amendment to the minimum wage level was published. This is interesting for several reasons, primarily because a new mechanism was applied for the first time to determine the minimum wage that bound it to the dynamic of the average. This means that in the context of increased inflation and the consequent rapid growth of salaries, leads to its largest nominal growth for the last two decades that will have rather much a significant impact on the labour market compared to its traditional growth. Once again, it emphasizes the need for amendments and precisions in the accepted mechanism.
In the beginning let’s to remember who the new mechanism works. This mechanism introduces the European Commission’s requirement to determine the minimum wage as 50% from average salary or 60% from the median. In Bulgaria’s case, the first approach was chosen, as for the basis first two quarters of current year and the last two of the previous year are taken, with the purpose to be maximum actual with used data for the moment of conducting the budget procedure in the fall. Apparently, the biggest weakness of this approach lies in a strong uneven one between separate economic activities and regions of the country.
The determined layer with the mechanism of minimum wage is 933 leva, or 153 leva higher compared to 2023 year. But submitted as proportion of the average for diverged economic activities it is definitely to see wide differences. While the new minimum wage is represented barely as 20% from average salary in the ICT and the telecommunications, 30% at the energy, 32% in the finance and the insurance, and 33% in the mining industry, it reaches as much as 78% in the hospitality and restaurant business industries, and 66% in agriculture (by the way, these shares are very close to those predicted by the IME at the end of 2022, when the introduction of the mechanism was discussed).
The differences, though smaller, are still significant at the same time, in the “coverage” of minimum and average wage across the regions and districts of the country. The capital, with its plenty large labour market, is the only region where the minimum average is below 50% of the average. In only 19 districts is it over 60%, and in Smolyan, Haskovo, Silistra, Blagoevgrad, Kyustendil and Vidin, it exceeds 70%. As with the industries, so with the districts there is clearly visible weakness of supplement of current mechanism. Although it reaches 50% coverage of the average from the minimum wage at the national level, and these results are in the weakest developed parts of the country and the sectors, the rapprochement is mush more aggressive.
What consequences can we expect? In the assessment of the impact for the offer of actualisation is included interesting statistic - according to it, the number of employed with minimum wage is 442 thousands people in the second quarter of the year, as it decreased with 5% concerning to the same period of the last year. To what extent it is considerable portion of the common employment, the direct administrative growth of income in this group of people (with more than 150 BGN at once) can create a severe venture from further the inflation onslaught. Here we are talking primarily about poor people or the households that are close to poorness, where the growth of salaries will lead to higher current consuming. After that, to the extra consumer prices onslaught, with whose high growth several successive governments are struggling. It shouldn’t be neglect the possibility of the sharp increase in expenses for the labour to push the businesses already has been pressing by the deteriorating economic conditions to losses and therefrom to losses of work places.
We also shouldn’t overlook self-insured individuals, whose insurance and minimum insurance income will unavoidable be affected by the size of the minimum wage. According to the latest information from NSI, there were 883 thousands self-employed individuals in 2022 year. Although the raising of their insurances could mean a substitutional rising of budget incomes and therefrom (in pursuit of a 3% budget deficit) sharp increasing of minimum wage will definitely means reducing of available income for self-employed due to the new insurances size.
There are not real grounds to claim that Bulgaria has the immediate affect by increased minimum wage along the lines of shrinking employment and increasing unemployment. But with the necessary clarification that the present increasing is much more sizeable than those we have seen in the last two decades. The grounds to expect the effects in situation with high and almost universal searching of labour and shortage of workers are much less, and where every worker is momentous. However, it does not seem out of the question that employers and workers could agree to keep their current relationship – and wages – but in the grey market, where they do not have to comply with the new state requirements. This, of course, goes against the clearly stated goal of the current government to actively struggle the underground economy and pocket wages.
At the end, the binding with average wage creates a kind of self-feeding growth mechanism - essentially, an increase in the minimum wage leads to growth of the average. Under the default approach, this could necessitate a new rise in the minimum wage for the potential equalization. The side effect could be an inflation abrupt due to nominal growth of incomes of employees, with lagging productivity growth.
Does it signify that the process of application of mechanism for the minimum wage is certainly bad? Definitly no, because the present mechanism was activated at the worst possible moment of the elevated inflation and rapid, but unevenly surging of average wage. However, there is the fundamental positive effect - removing the determination of this crucial threshold from syndicates and employer’s agreements and linking it with the objective economic realities of the country. However it means that the mechanism clearly requires correction and refinement.
The simplest way to achieve that is by using the median salary instead of average, as the other variant states which was proposed by European Commission. The median has a smoother dynamic and is much less susceptible to the extreme values, which have a particularly huge role in determining the average in Bulgaria due to large differences amidst the sectors and the regions. The obstacle to the expansion of this method is that the median is calculated much less frequently than the average wage (only once every four years). But this means that the national statistic office would need to “hump” with more frequent tracking and posting of another one indicator.
However, it is much more important to enrich the formula of the minimum wage, so that it takes into account much more fully the state of the economy and the labour market. For this aim, it should be taken with others indicators - growth of economy, changes in consumer prices, labour productivity dynamics, employment balance, unemployment and proportion of inactive individuals in the labour market… The list with potential indicators is wide and the formulation of certain mechanism is an effort, long away from the periphery of current text. It is important, however, that it provides much more adequate and predictable increase in the minimum wage than the current, and at the moment of economic conditions deterioration and the risk of unemployment increase - it should prevent significant growth.
It is appropriate to take on eye the regional and sectors’ disparity. The regional coefficients application could enable a slower increase in the minimum wage in less developed economic parts of the country, which shouldn't additionally limit the access of the employees with lowest experience and level of skills to the labour market. The industry’s approach also is irrelevant. It is not surprising that the sectors where the minimum wage approximate mostly to the average are exactly those with the highest rates and shares in the underground economy.
In conclusion, the first step has been taken with the introduction of a formal mechanism for the minimum wage. However, the next step involves finishing touches and refinement of it so that it imports a maximum less distortions in the labour market, which are inevitable during applying for regime of the minimum wage.
