Estonia and Lithuania can. Why not Latvia?
Latvia has one of the lowest minimum wages in the EU. Only Bulgaria, Romania and Hungary have a lower minimum wage than the 370 euro per month in Latvia, while the income inequality is the second biggest in the EU. Raising minimum wage reduces poverty.
In Lithuania and Estonia not only minimum wage is higher, but also non-taxable minimum is bigger. In Estonia minimum wage this year is 430 euro, in Lithuania – 380 euro. Wage increase in Estonia was 40 euro this year (with plans to raise it by the same amount next year), 55 euro in Lithuania, and 10 in Latvia. While in Latvia non-taxable minimum is 75-100 euro, to be gradually increased to 160 euro in 2020, it’s already 200 and 170 euro respectively in Lithuania and Estonia right now.
Latvia has strong business owner organisations and weak trade unions – employers that could afford to pay more are not compelled to do it. Progressive taxes apart, raising minimum wage is just about the only way for the state to influence higher pay for low-skilled workers, simultaneously bringing the average salary in the country up as well. For example, last year, when minimum wage was raised by 40 euro or 12.5%, the average salary went up by 6.8%. This year, when that minimum was raised by 10 euro, the average went up by 5.3%.
In Latvia low wage earners pay a disproportionate amount in taxes – they’re left with the least cash after taxes. Compared to other Baltic countries, in Latvia the tax burden for low wages (540 euro before taxes) is nearly 29%, while in Lithuania it’s 20%, in Estonia – 18%, but in the EU – 25%.
There is a risk that employers who won’t be able – or are unwilling – to raise wages, will pay more in “envelopes”. The popular argument isn’t backed up by statistics, though. The last time minimum wage was raised, was January 2016, and since then the number of businesses paying minimum wage and less has decreased by 3.3%. Also the European Commission in its latest evaluation of Latvian economy notes that raising minimum wage has lifted a certain part of workforce into legal economy. A number of employers have tried to evade raising wages, though – by declaring smaller workloads than the employees actually do.
The minimum wage component in the average salary in Latvia is sufficient. The opinion of International Monetary Fund is that the burden of minimum wage starts getting cumbersome when it reaches 40-50% of the average salary. If next year minimum wage was raised up to 410 euro, as Ministry of Welfare originally proposed, in Latgale that would already be 70% of the average salary, and in other regions over 50%, except only Riga and its vicinity.
The increase is too rapid, if compared to productivity, and threatens competitiveness. This is pointed out both by ministries in Latvia and the European Commission. However, the speed is relative. In Estonia, for example, minimum wage has been raised by 47% over the last four years, in Latvia – by 32,4%. Productivity indicators are not radically different: in Estonia it’s 70% of the EU average, in Latvia – 64%. Plus, in Estonia both the social taxes paid by the employer and corporate income tax are higher.
Even bigger social stratification between Riga and its vicinity, and other regions. The average salary in regions is lower than in Riga, and, with costs rapidly increasing, businesses in regions may go bankrupt and their owners may not create any more new companies. Ministry of Finance points out that since the crisis new jobs have “mostly” been created only in Riga and its vicinity, while in Latgale, Kurzeme and Vidzeme the number of jobs taken has decreased.
Written by Inga Spriņģe
Edited by Sanita Jemberga
Infographs: Lote Lārmane, Sanita Jemberga
Photos: Reinis Hofmanis
Translation in English: Laura Ziemele
Whole package in Latvian (link)
This is an English summary of the latest Re:Baltica series on social inequality in Latvia