Almost half of Latvians earn less that 500 euro a month before taxes. Government agrees to increase a minimum wage by 10 euro, leaving country behind its Baltic neighbours.
Every morning Jana Treija (62), a cashier at Rimi supermarket in Riga, arrives at work at seven. She walks to work – the supermarket is right next to her home. First she arranges the latest newspapers and lifestyle magazines at the checkouts, and at eight, when the shop opens its doors, takes her seat at the cash register.
Jana tries to work fast. The number of items scanned per minute and customers served per month is recorded and evaluated. Since Jana’s workplace is located in a large shopping mall, she serves about 14 000 people each month – an average-sized small town in Latvia. When she started, Jana was at the bottom of the cashiers rating list, but already in June received an award as the best salesperson of the month. She spent the 30 euro gift card on hair care. “Have to be prettier when you go to work, can’t look the same as at home,” explains Jana, with her hair cropped short and facial expressions lively.
In December 2016 Jana will reach retirement age, but she’s not going to leave her job at Rimi. “I can’t live without work”, she says. She is happy with the job responsibilities and the colleagues. It’s just the salary. Standing at about 400 euro after taxes, it seems too small. “If you work hard and are thorough, you want to earn more”.
One euro more
The Swedish-owned Rimi is one of the two biggest supermarket chains in Latvia – the other is Maxima, backed by Lithuanian investors. Among them both giants employ 13 500 people in total – another average-sized small town in Latvia. The difference in the salaries of their cashiers is one euro. Cashiers at Rimi are paid on average 469 euro a month before taxes, while at Maxima that number is 470 euro. When all taxes are paid, people get about 340 euro to sustain their families for a month.
In Sweden a Rimi cashier is paid three times as much, if the salaries are adjusted to Latvian consumer prices. In neighbouring Estonia – which some would claim is easier to compare to Latvia than a wealthy Sweden – a cashier in Rimi gets over 100 euros more than her Latvian colleague.
Rimi is not a company that cannot afford to pay more. Over the last three years in Latvia, one of the poorest countries in the EU, their profit has been 63.1 million euro, 55.2 million of which were paid out in dividends to owners.
The profit margin (EBIT) of Rimi in Latvia in 2016 was 4%, which is higher than retail’s average 0.5-3.5%. In Estonia it was 0.2%, but cashier wages were higher. Both the average and statutory minimum wage is higher in Estonia, as their unskilled workers are easily drawn to nearby Finland. Helsinki, the capital, can be reached in two hours by ferry.
So why a company which promotes itself as socially responsible business does not pay more to their low-skilled workers, when it clearly can afford it?
To put it simply, in Estonia Rimi pays their cashiers more because they cannot afford not to. Finland is so close you can leave in morning and be home by dinner, and size of labour market is tiny. Statutory minimum wage is higher. In Latvia minimum wage is raised much slower than in the neighbouring Estonia and Lithuania, even if their economies are not that different. Trade unions are weak, whereas business owner lobby is strong. There’s also a lack of powerful independent economists in public debate, who could justify the necessity of raising minimum wage and non-taxable minimum, and analyse the consequences of lack of solidarity.
Instead of raising wages, supermarkets are raising productivity. The latest example is the self-service checkouts which started to appear in a big Latvian supermarkets this summer. Although both retail giants say those are being introduced for customer convenience, they’re also not trying to hide that it is a way to substitute the gaps in their workforce which they cannot fill anymore. Therefore machines are taking over people’s work, but no one gets fired.
Blame shadow economy
For the average Latvian employee Rimi is not a bad employer. Smaller retail chains pay even less, and partly “in envelopes” – an illegal practice where cash is given with no taxes paid. The Latvian Food Retailers Association (LPTA), which consists of three members – Rimi, Maxima, and Narvesen newsagent network, pays their employees on average 100 euro more per month than other retail establishments. LPTA have just three members because the others could not provide the guarantee that all their business is legal, claims Noris Krūzītis, head of LPTA.
In the LPTA enterprises 19% of employees make less than minimum wage, while at their competitors’ that portion is 33%.
According to research conducted by Stockholm School of Economics in Riga, retail is the second biggest sector in Latvian shadow – or grey – economy. Researchers figure that on average 25% is paid on top of the official wages, avoiding taxes (LPTA estimate is less, about 15%). Only the building industry fares worse.
Shadow economy is the first answer which Rimi provides to the question why they’re not paying their unskilled workers more, even though they could.
Re:Baltica wanted to talk to Edgar Sesemann, CEO of Rimi Baltija, but he wouldn’t agree to meet face-to-face. His answers arrived via e-mail and strictly adhered to the public relations line previously voiced by their human resources specialists in interviews with us. Rimi pay more than other food retailers. Wages are regularly raised for everyone, especially those with longer service record. Employees have health insurance, can have training and Rimi subsidizes part of their university fees if they are students.
“First thing that should be solved to rise salaries are connected with shadow economy. If State Revenue service would be able to ensure that all the companies are working by the same rules and all the companies are paying taxes, market situation would change and we could increase salaries much faster,” Seseman wrote. “This is a serious problem and extremely important aspect of this discussion.”
The minimum wage in Latvia currently is 370 euro before taxes. It is the lowest in the Baltic states. The government has reached an agreement to raise it by 10 euro in 2017 – the economy is said to be unable to handle a bigger raise. In the neighbouring Lithuania and Estonia, whose economies are not radically different, minimum wage has been raised by 80 euro over two years, while in Latvia – by just 20.
According to official statistics, almost every second person you could meet on a Latvian street makes less than 500 euro per month before taxes (41.7%). 17% of employees earn minimum wage. Most often these are youngsters or people approaching retirement, like cashier Jana.
In summer of 2016 Latvian Ministry of Welfare proposed the government to increase minimum wage by 37 euro, but neither coalition partners nor country’s Central Bank agreed. Business owner organisations were against as well, pointing out that productivity increase is slower, and raising the low wages would pressurize employers to raise the other wages, too, while the outlook for the economy is bleak (Bank of Latvia has reduced the GDP growth forecast, projected to be 2.7% at the beginning of the year, to 1,4%).
The CB also warns of possible layoffs and price hikes in the case of rapid increase of minimum wage, as in a questionnaire conducted by the bank 21% of participating businesses admitted that this was how they had financed the previous wage raise. 16% said they would fire people or not hire new employees – which, in the opinion of the bank, means increased emigration.
Minister of Finance Dana Reizniece – Ozola (Union of Greens and Farmers) said to “Re:Baltica” that her particular worry is Latvia’s poorest region, Latgale. The region which is EU eastern frontier, bordering Russia and Belarus, is chronically suffering from a lack of people, money and employment. Reizniece said that a third of the workforce in Latgale is already on minimum wage, and employers are reducing workloads so that they don’t even have to pay that minimum. If wages are raised, the number of “envelope salaries” is likely to increase, she insisted.
Statistics, however, does not back up the statements. Shadow economy in Latvia has diminished in recent years, but the number of part-time working hours has only gone up by 0.8%, according to the State Revenue Service data.
Urmas Varblane, professor of economics at University of Tartu, explained to “Re:Baltica” that the latest minimum wage raise in Estonia was followed by a slight, but not significant increase of shadow economy in the service industry. In construction, the industry with the biggest shadow economy, the Estonian tax authority has introduced a new control mechanism, which has substantially reduced the “black market”.
Lithuania raised minimum wage twice this year to reach 380 euro, justifying that it’s among the lowest in the EU, explains Romas Lazutka, professor at Vilnius University. He half-joked that upcoming parliamentary elections played an important role in the decision.
Both Varblane and Lazutka emphasize the importance of notifying business owners of decisions to raise minimum wage in a timely manner, so that they can prepare. Both also pointed out that, contrary to the ever-popular Latvian argument that productivity is lagging behind the wage increases, the rise of statutory minimum wage and bigger labour costs forces companies to innovate, not stagnate. “Otherwise you just don’t pay attention to that,” says Varblane.
Low wages, high taxes
Eurostat data reveals that in Latvia people the poorest people pay higher tax rates compared not just to neighbours Lithuania and Estonia, but also to the EU average. Those who make half of the average salary pay 27.5% of it in tax in Latvia, while in the EU that number is 20.8% (in Lithuania and Estonia it’s between 16 and 17%). Medium and big salary earners pay almost EU-level taxes.
If a Latvian and an Estonian received the current minimum wage in Latvia – 370 euro, the former would get 272.24 euro after taxes, whereas the latter would pocket 325.26 euro.
Estonia’s non-taxable minimum is higher, income tax is lower for individuals and higher for businesses, and employee social security contributions are significantly lower.
Although employers in Latvia regularly complain about the high tax burden, the cost of one employee with a minimum wage identical to the one in Latvia is 8.26% higher for an Estonian business, according to calculations by the law firm “Sorainen” which specializes in comparing taxation regimes.
The opponents of raising minimum wage – Bank of Latvia, Minister of Finance, business lobby – unanimously insist that a more efficient way of reducing income inequality and helping low wage earners would be raising non-taxable minimum. None of them proposes to discuss it within this year’s budget, though.
Reizniece told “Re:Baltica” that currently there are no plans to raise non-taxable minimum, because yet another tax strategy is in the works, where “all these matters are viewed together”.
Labour market will adjust itself
One of the reasons that makes wage-increases inevitable is Latvia’s shrinking labour market which is under pressure both due to ageing population and significant emigration to richer EU countries. At Rimi about 4% of jobs are vacant, mostly in Riga.
In the not-too-distant future – 2030 – almost half of all workers in Latvia (46%) will be over 55 years of age, according to an estimate by World Bank. This is the only group in the labour market that’s growing – it has the largest number of people in the last 20 years.
There simply just won’t be many others to hire.
Jana is is fairly content with the quality of her life. Her small salary is supplemented by a state paid allowance for disability. Her four children help repair the tiny house she has inherited. Jana would love to earn more to travel to “somewhere warmer” time to time or to buy a boat. Both she and her husband are keen on fishing.
Meanwhile the CEO of Rimi says next year the company is going to start their biggest development project yet – a logistics centre in Riga – and invest 75 million euro. It nearly equals their five years’ profit. He promises it will bring more money to the economy and create new jobs. On the subject of wages the e-mail says nothing.