Is the Government’s decision to increase the minimum wage justified?

14 August 2020 year
Is the Government’s decision to increase the minimum wage justified?

The Government has decided to increase the minimum wage to UAH 5,000 from September 1, to UAH 6,000 from January 1, 2021 and to UAH 6,500 from July 1, 2021. Assessing the feasibility or validity of such a decision, it should be recalled that the main function of wages (including the minimum) is the reproductive function. It means that the salary ensures the reproduction of the employee’s workforce at a physiologically and socially acceptable level, as well as guarantees long-term performance of the employee.

In Ukraine, the actual subsistence level for able-bodied persons according to the official information of the Ministry of Social Policy in April 2020 prices amounted to UAH 4,948. This means that the current level of the minimum wage (UAH 4,723) lags behind the subsistence level per person, not to mention the need to maintain children and other disabled family members by working citizens. Thus, at present, the minimum wage does not perform its reproductive function. And its increase to UAH 5 thousand from September 1 will only equate it with the size of the subsistence level per person. In the future, permanent inflation in Ukraine should encourage a periodic increase (indexation) of the minimum wage.

International Labor Organization Convention No. 131 of 1970 stipulates that in determining the level of minimum wages, states shall take into account the following factors:

1) the needs of workers and their families, the cost of living in the country, the general level of wages;

2) the level of labor productivity, the requirements of economic development, the desirability of a high level of employment.

In Ukraine, unfortunately, the minimum wage for a long time did not meet the requirements of the Convention of Level I, and therefore its increase to UAH 5,000, and later to UAH 6,000 will help overcome the abnormal situation of low wages relative to the cost of living in the country.

Ukraine’s economy is currently characterized by significant disparities in wage levels between different categories of workers and different sectors of the economy. And often high and average wages are only partially reflected in official reports. But even if we make use of the official statistics of the State Statistics Committee and calculate the ratio of the minimum wage of UAH 5,000 to the official average, we get an indicator of 43%.

In OECD countries the ratio of the minimum wage to the average exceeds 45% in Austria, Belgium, Ireland, the Netherlands, Great Britain, Luxembourg, Portugal, Poland, the Czech Republic, Hungary, Lithuania, Romania, Slovenia and New Zealand. And this is despite the fact that almost all wages in these countries are official, and therefore the ratios are more or less reliable, in contrast to Ukraine, where the result of dividing the official minimum wage by the actual average (including shadow incomes) will be significantly lower than 43%.

Let us also consider the proportions of the distribution of Ukrainian GDP between different categories of income – wages, on the one hand, and profit, mixed income and taxes, on the other hand. In 2019, the share of wages in Ukraine’s GDP was 35.8%, and in the EU – an average of 38%. That is, the share of wages in Ukraine’s GDP is understated compared to EU countries, which is an argument in favor of raising the minimum wage.

Alternative data also confirm that Ukraine’s economy is characterized by a high degree of income inequality and low wages for many categories of workers. This, in turn, can be explained by the segmentation of the labor market and the dominance of employers in many segments, the oligarchization of the economy and cheap labor, the lack of labor unions, and others.

Therefore, the increase in the minimum wage and the concomitant increase in the average wage, in my opinion, will reduce the mismatches in the distribution of income between labor and capital factors, as well as between employees in various industries and professions.

Some experts criticize the low labor productivity in Ukraine, which should justify the low level of wages in general and the minimum wage in particular. But a question naturally arises as to the reliability of estimates of labor productivity in our country, which are tied to the calculation of official GDP and do not take into account the scale of the shadow economy. In addition, even if we operate with official data, the productivity of labor in Ukraine based on purchasing power parity (PPP) in 2019 amounted to USD 29.2 thousand for the year (WDI). This figure was 2.4 times lower than the level of labor productivity in Poland, while the level of the minimum wage based on PPP in Ukraine was 2.9 times lower than in Poland. Our gap in productivity levels (2.8 times) with Turkey was also not offset by the gap in minimum wage levels based on PPP (3.1 times). Ukraine lags behind Serbia 1.5 times in terms of labor productivity and 1.9 times in terms of minimum wage. Thus, even relatively low labor productivity in Ukraine is not an argument in favor of a significant understatement of wages.

Thus, a number of important factors indicate the need for a significant increase in the level of the minimum wage in Ukraine and testify to a good reason behind the decision taken by the Government. They include the separation of wages from the cost of living in Ukraine, the current disparities in income distribution, the ratio of labor productivity and the minimum wage, as well as the need to develop the national domestic market with the spread of isolationism and international trade decrease.

Doctor of Economics, Head of Public Finance Department, Growford Institute Tetiana Bogdan.

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