Government shelves social partners’ proposals to increase minimum wage
Published: 11 February 2007
The issue of the minimum wage has emerged as one of the leading topics for discussion between the social partners at national level. In recent years, the issue has been repeatedly raised at the Tripartite Council of the Republic of Lithuania (Lietuvos Respublikos Trišale taryba, LRTT [1]) (*LT0410101N* [2], *LT0501101N* [3], *LT0502101N* [4]).[1] http://www.lrtt.lt/[2] www.eurofound.europa.eu/ef/observatories/eurwork/articles/minimum-wage-increase-suspended[3] www.eurofound.europa.eu/ef/observatories/eurwork/articles/no-agreement-reached-on-minimum-wage-increase[4] www.eurofound.europa.eu/ef/observatories/eurwork/articles/agreement-finally-reached-on-minimum-wage-increase
In an environment of rapid economic growth and higher average wages, trade unions are lobbying for an increase in the minimum wage and in tax-free allowances. At the Tripartite Council of the Republic of Lithuania, held in October 2006, employer groups supported the trade unions in this aim. However, government representatives requested that the consideration of this issue be suspended until they had a chance to examine the likely consequences of an increase in the minimum wage on the national budget.
The issue of the minimum wage has emerged as one of the leading topics for discussion between the social partners at national level. In recent years, the issue has been repeatedly raised at the Tripartite Council of the Republic of Lithuania (Lietuvos Respublikos Trišale taryba, LRTT) (LT0410101N, LT0501101N, LT0502101N).
Minimum wage not in line with economic growth
Among the key reasons for the social partners’ increased interest in the minimum wage are rapid economic growth – gross domestic product (GDP) has increased by 6%–8% annually in recent years – along with the rapid increase in wages – the average wage has grown at a rate of 10% a year. Despite these positive trends, the minimum wage has still remained at a relatively low level of around LTL 600 (€174 as of 23 January 2007) a month. Economic growth and the rapid labour force migration, which began in 2004, have contributed even more to the country’s labour force shortage. It is expected that wage increases, including an increase in the minimum wage, will contribute to attracting people who are not in employment to the labour market and to retaining people who are considering emigrating.
Since 2003, the minimum wage, which remained frozen for a prolonged period of time, has been increasing by under 10% each year (see Table). However, even quite rapid increases in the minimum wage have not overtaken the growth in the average gross wage, and thus the minimum wage still remains relatively low.
| 2001 | 2002 | 2003 | 2004 | 2005 | |
|---|---|---|---|---|---|
| Average gross wage (LTL) | 982.3 | 1,013.9 | 1,072.6 | 1,149.3 | 1,276.2 |
| Minimum wage (LTL) | 430 | 430 | 450 | 500 | 550 |
| Minimum wage as a share of average gross wage (%) | 43.8 | 42.4 | 42.0 | 43.5 | 43.1 |
Source: Lithuanian statistics
Trade unions propose further increases
The minimum wage was last increased on 1 July 2006. At the first sitting of the LRTT after the summer break, members resumed their consideration of opportunities to further increase the minimum wage.
Although it has been customary in Lithuania that the issue of the minimum wage increase has, in most cases, been raised by government representatives at the LRTT, on this occasion the trade unions initiated the debate. The trade unions proposed to increase the minimum wage to at least LTL 700 (€203) a month, with effect from 1 January 2007. In addition, they proposed that the minimum wage should gradually be increased to approximately 50% of the average gross wage in Lithuania, thus suggesting that a fixed rate should be established instead of an annual increase in the minimum wage. This would enable an increase in the minimum wage pro rata to average gross wage growth, with a review, for example, every half year.
The trade unions based their recommendation mainly on the argument that a fixed rate would ensure economic stability: all stakeholders would know what to expect in the future and speculation on issues relating to the minimum wage increase could be avoided. Moreover, at present, according to the trade unions’ representative, increasing the minimum wage depends on the ‘political situation and forthcoming elections’.
In light of the fact that about half of the increased minimum wage amount does not go to the employee, but rather to the national budget in the form of income tax and social insurance contributions, the trade unions also advocated an increase in the tax-free allowance alongside the minimum wage increase.
Mixed response of social partners
Representatives of both employers and the government expressed reservations about the trade unions’ proposals. They argued that the proposals should not be considered until the impact of the proposed increases on the national budget and on business in Lithuania were estimated. Moreover, the employers and government regarded the 50% rate between the minimum wage and the average gross wage as being excessive. In addition, the Ministry of Finance (Finansu ministerija, FM) contended that the fixing of these values, which it argued are different by their nature, would be legally unjust.
After prolonged discussions, the social partners decided to carry out a feasibility study on the proposed minimum wage increase – the third such study in the last three years – and to make a final decision thereafter. The study was subsequently carried out and presented at the LRTT sitting in October 2006. The conclusive finding of the study indicated that, at present, possibilities existed to increase the minimum wage, and also that the tax-free allowance should be increased more rapidly in order to minimise differences in existing income.
In principle, the trade union and employer representatives support a more rapid increase of the minimum wage and tax-free allowance, suggesting that the minimum wage should be increased to up to LTL 700 (€203) or by 17% a month, and that the tax-free allowance should be increased to up to LTL 320 (€93) or by 10%, with effect from 1 January 2007. Moreover, they recommended that the tax-free allowance should be increased by 25% to up to LTL 400 (€116), with effect from 1 October 2007.
However, government representatives did not support such proposals, arguing that it would be difficult to measure the impact of such increases on the national budget. They emphasised that such a move should only be taken after detailed calculations estimating the likely consequences of the abovementioned increases. At the request of the government representatives, discussions on this issue were suspended and postponed until another LRTT sitting in the future.
Inga Blažiene, Institute of Labour and Social Research
Eurofound recommends citing this publication in the following way.
Eurofound (2007), Government shelves social partners’ proposals to increase minimum wage, article.
