Government proposes decoupling minimum wage from social benefits and contributions

In June 2008, the Romanian government issued draft legislation that would sever the current link between the national minimum wage and the level of a number of social security benefits, allowances and contributions. A new inflation-linked ‘reference indicator’ would be used instead. The objective is to reduce the effect of minimum wage increases on public expenditure.

Background and rationale

The statutory national minimum wage is generally set every year by government decision. In December 2007, the government decided that, with effect from 1 January 2008, the minimum wage would rise to RON 500 (approximately €149) per month (RO0711029I). At the same time the government decided that, if the state budget’s assumptions were met (in terms of growth in gross domestic product, the planned inflation rate and the increase in labour productivity), the minimum wage would rise further to RON 540 per month from 1 July 2008.

Current legislation provides that the statutory minimum wage serves as a reference point for the calculation of numerous social security benefits, contributions and allowances, and well as a variety of incentive payments. In June 2008, the government issued for public debate draft legislation amending this system. The minimum wage would no longer be used as the basis for calculating many benefits, allowances etc, being replaced by a new ‘reference indicator’. The aim is to reduce the effect of minimum wage increases on public expenditure.

At around the same time, the government announced that, due to price rises for crude oil, natural gas and food, the target inflation rate will be exceeded in 2008. Therefore, the conditions for the planned further minimum wage rise from 1 July 2008 have not been fulfilled and the rate will remain at RON 500 per month.

The labour minister stated that the legislative initiative to decouple the minimum wage from benefits, which was made public after discussions with the national trade unions confederation and employer organisations that are representative at national level, had no connection with the ‘battle’ over whether or not to increase the minimum wage from 1 July. However, the minister had earlier stated that one reason that the government would not raise the minimum wage was because this would entail the automatic growth of some benefits and allowances.

Proposals in detail

The new law would amend seven acts, two government emergency ordinances and one government ordinance in order to abolish the link between various benefits, allowances etc and the minimum wage. They would instead be based on a ‘reference indicator’. Initially, this indicator would be RON 500 per month, i.e. the current minimum wage rate, but from 1 January 2009, the indicator would increase in line with the consumer prices index rather than the minimum wage.

Current legislation provides that the minimum wage is the calculation base for:

• monthly unemployment insurance contributions;

• the incentives granted to employers for hiring unemployed people;

• the monthly incentives granted to employers that hire high-school and academic graduates;

• the amounts paid to employers for the on-the-job vocational training of apprentices;

• welfare benefits for bringing up children, and to assist disabled people;

• the monthly allowance for elderly people;

• benefits for asylum-seekers without means of support;

• the allowance for people providing full-time care to the disabled.

From 1 January 2009, all of these contributions and entitlements would be determined on the basis of the reference indicator, rather than the minimum wage.

The minimum wage would continue to be basis for calculating:

• health insurance contributions;

• monthly merit bonuses granted by the Ministry of Culture (Ministerul Culturii şi Cultelor, MCC);

• maintenance allowances for visa applicants in Romania; and

• fines for violations of road traffic rules.

Commentary

Following debates in the Social Dialogue Committee of the Ministry of Labour Family and Equal Opportunities (Ministerul Muncii, Familiei şi Egalităţii de Şanse, MMFES), the social partners appear to have accepted the decoupling of the minimum wage from some social welfare benefits and contributions.

However, trade unions are still demanding that the minimum wage should be increased as originally planned from 1 July 2008, and have held protests to support their demands. Employer organisations state that they are in favour of increasing the minimum wage, but have asked the trade unions to relinquish the pay scale in the national collective agreement (RO0702019I). At present, an increase in the national minimum wage triggers an increase in minimum agreed rates at all levels of the pay scale, as these rates are calculated as multiples of the national minimum wage. For example, the minimum starting basic pay rate for holders of an academic degree is twice the national minimum wage.

If the employers’ proposal were agreed, the functions and effects of the national minimum wage would be considerably diminished in practice.

Constantin Ciutacu, Institute of National Economy, Romanian Academy