National minimum wage agreements, Estonia

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Country: 
Estonia
Sectors: 
All
Target Groups: 
employers/purchasersworkers/suppliers

 

In Estonia, national minimum wage rates are negotiated through bipartite agreements between the Estonian Trade Union Confederation and the Estonian Employers’ Confederation, which are then translated into regulations by the government. The minimum wages are applied across the whole economy. One of the arguments behind raising minimum wage levels has been to reduce the share of undeclared wages.

 

Background

According to the Estonian Institute of Economic Research (Eesti Konjuktuuriinstituut, EKI), there is a clear pattern that shows that the share of people receiving undeclared wages is higher in lower-income groups (Estonian Institute of Economic Research, 2012). Thus, people receiving minimum wages are a risk group in terms of undeclared income. It is shown that among employees who earn a net income of up to €200 per month per one family member, the share of those who receive undeclared wages is 12%, compared to just 5% among those earning €601–€800 per month (Estonian Institute of Economic Research, 2012). It is also shown that people with lower income tend to be more satisfied with undeclared wages compared to the average (13% among low-income groups compared to 5% in the general population) (Estonian Institute of Economic Research, 2012). An important justification is that taxes on wages are otherwise too high (70% of those who are satisfied with undeclared wages) and that undeclared wages enable them to keep more money for themselves (68%) (Estonian Institute of Economic Research, 2012).

Objectives

National minimum wage agreements concentrate on raising the minimum monthly salaries that all employers are obliged to pay for their employees. Raising the minimum wage has multiple purposes. The Estonian Trade Union Confederation (Eesti Ametiühingute Keskliit, EAKL) has constantly stressed that one of the purposes of increasing minimum wage rates is to reduce the share of undeclared wages. In 2011, EAKL noted that this will improve the government tax income and also help to tackle unfair competition in the market and raise economic growth, since declared taxes would be reflected in the official economic statistics (Estonian Trade Union Confederation, 2011).

Specific measure

The national minimum wage was fixed by a tripartite agreement from 1992 until 2002. Since then it has been negotiated between the social partners EAKL and the Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK) (see also ‘Actors involved’ below). Based on their agreement, the government enacts legislation that puts the national minimum wage into effect.

The minimum wage that is enacted by law is mandatory for all employers, i.e. it is not allowed to pay lower salaries to employees. An hourly minimum wage rate is also calculated for those not working on a full-time basis. The minimum wages are usually set for one year and thus new negotiations for the following year take place each year (for the size of minimum wage agreements, see ‘Achievement of objectives’ below).

There are also several other aspects that are related to the minimum wage rate agreed for each year. For instance, the payment of several support measures is at least partly dependant on the minimum wage rate, including the minimum rates of parental benefit and unemployment insurance benefit, as well as the payment during leave for training or salaries of some categories of public sector employees (including library or cultural workers, members of the supervisory board of some public agencies, etc.).

Actors involved

The national minimum wage agreements are concluded between the Estonian Trade Union Confederation and the Estonian Employers’ Confederation. The government implements the national minimum wage with a regulation based on the agreement between the trade union and employers’ organisations.

Outcome of evaluations: lessons and conclusions

Achievement of objectives

Minimum wage rates in Estonia increased rapidly during 2005–2008 as a result of high economic growth. The increase peaked in 2008, when the minimum wage rate increased by 20.8% compared to the minimum wage rate in the previous year (see also EE0712019I). After that, the minimum wage rate remained unchanged until the end of 2011 due to the economic crisis. At the end of 2011, the social partners reached an agreement to raise minimum wages slightly again in 2012 – the agreed increase was 4.3% (see also EE1201019I). However, since the average wage increased rapidly during this period as well, the share of minimum wages in the average wage has remained around 32%–34% throughout the period.

Obstacles and problems

Despite the rapid increase in minimum wage rates, it still has not been possible to raise the minimum wages to the expected level compared to average wages in the country. For instance, as pointed out by the trade unions, the European Council has proposed that the minimum wage rate should be at least 60% of the national average wage, while the share of employees receiving salaries on a lower level should not exceed 5%. This is strongly supported by the trade unions in Estonia (Estonian Trade Union Confederation, 2011).

In 2001, EAKL and ETTK signed a bipartite agreement on the principles for establishing the minimum wage in the period up until 2008 (EE0311101N). According to this agreement, the rise in the minimum wage should be more rapid than the rise in the national average wage, so that the minimum wage reaches 41% of the national average wage in 2008. However, it has not succeeded in raising the share above 35%.

Lessons learned

As a measure of tackling undeclared work, it is difficult to make direct links between the changes in minimum wages and the reduction in undeclared work. While the minimum wages increased constantly during 2005–2008, the share of undeclared wages has been fluctuating between 12% and 14% and the trends are not as clear-cut. Thus, there are other factors at play here that need to be taken into consideration, including the economic cycle.

Impact indicators

Based on data from 2006, 4.7% of Estonian full-time employees receive minimum wages (Eldring and Alsos, 2012). However, it is not possible to establish a direct link between changes in minimum wages and reduction in undeclared wages as an impact indicator. Thus, there is not enough data to assess the impact of the measure.

Transferability

In Estonia, the minimum wage rates are applied across the whole economy. Regarding transfer to other countries, there are minimum wage agreements in several other European countries as well, either at national or sectoral level. Thus, minimum wages as a tool to tackle undeclared work should be relatively easily transferable across countries. However, it needs to be considered that the coverage of minimum wage agreements across different countries might be different.

Contacts

Estonian Trade Union Confederation: http://www.eakl.ee/

Estonian Employers’ Confederation: http://www.employers.ee/

Estonian Ministry of Social Affairs: http://www.sm.ee

Commentary

The social partners have made different proposals on the future of wage agreements in Estonia. For instance, the trade unions support taking wage agreements to sectoral level to make the agreements on the wage levels of different occupations more flexible. EAKL has pointed out that the importance of the national-level minimum wage can be reduced after the sectoral agreements, which would cover most of the Estonian employees (Estonian Trade Union Confederation, 2011). However, only a few sectoral-level minimum wage agreements have been concluded in, for example, the transport sector and healthcare system.

The Estonian Employers’ Confederations has made proposals to reduce the importance of minimum wage agreements in their current form and adopt a more flexible model of minimum wage agreements to support employment (Estonian Employers’ Confederation, 2010).

Bibliography

Eldring, L. and Alsos, K. (2012), European minimum wage: A Nordic outlook, Fafo, Oslo. Estonian Employers’ Confederation (2010) Tööandjate manifest 2011–2015 [Employers’ manifest 2011–2015]. Estonian Employers’ Confederation, Tallinn.

Estonian Trade Union Confederation (2011) ‘Argumendid töötasu alammäära tõtsmiseks 2011. a. aprillis’ [‘Arguments for raising the minimum wage rate in April 2011’], available at http://www.eakl.ee/?&pid=497&lang=5.

Kirsti Nurmela, Praxis Centre for Policy Studies

 

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