Experts meet to discuss income policy

On 3 October 2013, Bulgaria’s social partners took part in a tripartite round table meeting with international experts to exchange experience and best practice for the modernisation of income policy. Participants included representatives of state institutions, trade unions and employers, as well as experts from the Low Pay Commission in the UK and the International Labour Organization. They discussed the changes needed to modernise the wage system and avoid the low-wage trap.

Wage system modernisation

Participants in the round table meeting included representatives of state institutions, trade unions and employers, as well as experts from the Low Pay Commission in the UK and the International Labour Organization (ILO).

In his opening speech, Minister of Labour and Social Policy Hasan Ademov stated that the financial crisis had affected almost all sectors of Bulgaria’s economy, with small businesses and their employees being hit particularly hard. A more active income policy would create better conditions for increasing domestic demand, he said, which in turn would stimulate production.

The government is not planning any changes to the tax system, but it will raise the statutory minimum wage at the beginning of 2014 from the current BGN 310 (€158.50) to BGN 340 (€173.84). The government also proposed using the ‘Swiss rule’ for updating pensions (BG1304031Q). Under this rule, any pensions granted before 31 December of a given year are increased annually from 1 July of the following year; the rise should be half the percentage increase in contributory income plus half the percentage rise in the consumer price index for the preceding calendar year.

Social assistance measures are also proposed for the poorest sections of the population, primarily through raising employment levels and household incomes. Measures include qualification and requalification schemes, traineeships and apprenticeships, subsidised employment and a youth employment guarantee.

Minister Ademov called on the social partners to join forces to develop and adopt a mechanism setting out specific criteria and indicators for calculating the minimum wage, and for employers and trade unions to find a way to agree about when and by how much to increase the minimum wage.

International expert opinion

Joining via video conference, Patrick Belser, Senior Economist at the ILO, focused on how wages influence both social justice and macroeconomic performance. He reminded attendees that the ILO Report, Promoting decent work and social justice in Bulgaria (2.5MB PDF), highlights the need to diversify the drivers of growth. It suggests that further wage restraint will depress aggregate demand in the coming years. A strong link needs to be made between wages and productivity, he said.

In the ‘growth years’ before the crisis, real wages grew more slowly than labour productivity, and this had been consistent with the decline in the labour income share. During the crisis, the labour income share has temporarily increased, perhaps due to its counter-cyclical nature. However, reported average wages remain very low by European standards. Bulgaria’s gender pay gap is high and it also scores highly on measures of inequality.

Patrick Belser added that wage growth not only depends on labour productivity growth, but also on labour market institutions such as minimum wages and collective bargaining. Considering the minimum wage level, he referred to the social and economic criteria in Article 3 of the ILO Minimum Wage Fixing Convention, 1970 (No.131) and proposed ways to apply these criteria in Bulgaria through:

  • calculation of a minimum living wage;
  • calculation of the ratio of minimum to mean and median wages;
  • the percentage of paid employees affected;
  • the simulated impact on the total wage bill.

In other countries, he said, annual adjustments most frequently take account of inflation and economic or labour productivity growth.

UK shares experience

Tim Butcher, Deputy Secretary and Chief Economist at the United Kingdom’s Low Pay Commission, stressed that the national minimum wage provides a UK-wide hourly wage floor, below which employers may not go unless an employee was specifically exempt from the minimum wage provisions. The UK’s minimum wage policy had been introduced as part of a three-part strategy to ‘make work pay’ through:

  • a guaranteed national minimum wage;
  • more generous in-work tax credits;
  • less generous out-of-work social benefits.

The Low Pay Commission was set up in 1997 to define the national minimum wage and recommend its introductory level. It is made up of nine commissioners, of whom three are independent (a Chair and two academics), three have experience as employers and three are from a trade union/employee representative background. The Low Pay Commission can be considered successful, Tim Butcher told the conference; the minimum wage has clearly affected the distribution of earnings in the UK. Its methods, based on evidential decision-making, widespread consultation, social partnership and independence from government, could therefore be used as a good model for the process of minimum wage setting.

Employers’ and trade unions’ reactions

Bulgarian experts from employer and trade union organisations rated the shared international experience as very useful and emphasised the need to enhance the role of social partnership in determining Bulgaria’s minimum wage.

In addition, they said, particular attention should be paid to bipartite collective bargaining at sectoral and company levels. The questions of the level of pay and by how much it should increase should depend on the use of a modern analytical wage system, providing better and more fair assessment of the individual and collective contribution to the results achieved. Both sides agreed that this would be beneficial for both employers and employees.

Commentary

Trade unions in Bulgaria have strongly criticised pay systems that are too flexible. Several studies have shown that, in a crisis, it is common practice for bonuses and other flexible elements to be reduced or eliminated, leading to a reduction in gross wages. The overall result is effectively a relaxation of particular clauses in collective agreements.

However, the stance of employers has traditionally been that more flexible pay systems are a reliable tool for maintaining competitiveness in a dynamically changing economic environment.

Lyuben Tomev, ISTUR

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