Economic Policy Review ISSN 1313 - 0544

Labour Market

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1. The statutory minimum wage has been increased to 160 leva (82 euro) or by 6.7%.

At first sight, this change looks positive, especially for low-income people, but in practice there are various negative effects. Among them we can point: (a) it imposes additional burden on state budget, but the real costs will be born by the business; (b) statutory minimum wage impedes the free labor negotiations between the employer and employee; (c) Minimum wage and its growth create a higher risk of unemployment because when the marginal costs per worker rises and the marginal revenues are constant or fall then the employer will simply hire fewer workers and thus the employment will be smaller than the case when there are not such wage restrictions; (d) Minimum wage is harmful for low productivity workers, for young people who wish to start working, for some disabled persons and, in fact, for the most vulnerable social groups.

As a summary, the labour minister should stop further increases and start promoting abolishing of minimum wage. If this does not happen our only hope is the finance minister who should categorically stop any request for increase and why not for its decrease.

2. Budget sector salaries have been increased by 6% since July 1st, 2006. Since the increase is not result of higher labour productivity in state sector, we think that this hampers ordinary citizens’ rights that finance this change. Salaries increase, when combined with state administration growth, and additional privileges of “civil service” make it harder to justify tax reduction. This in turn, hampers economic growth and increase of incomes in private sector.

3. Since February 2006, a compulsory insurance “labour accident” has been introduced. It is paid by the employers in risky production sectors. During the discussions to impose the insurance the government didn’t present any estimations on how this insurance will improve the working conditions or decrease working incidents, neither how much will be the costs for the employers. The negative effects of such regulation can be misreporting of incidents, respective regulating bodies will have additional influence over employer that can lead to corruption practices, increased costs can lead to opposite results – lowering of work safety, in long-term perspective the employers will try to transfer higher costs to consumers, etc.

4. The social minister proposed that the state budget pays part of the social security contribution currently paid by the employer. This means that tax burden on labour will decrease. Using budget surplus for such effective tax decrease will stimulate economy growth.

5. The social minister insists on implementing a special formula for regulated wage increase in the economy. It is intended to compensate for the abolishing of minimal seniority bonuses. The formula will be recommended for the private sector but nevertheless it shows the mistrust of the government towards market forces in wage formation.

As a summary, the labor policy of current government shows that it has no intention to withdraw and rely on market forces and therefore we will hardly see any significant positive developments that we strongly need.