Pay developments over 2003-4 examined

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In the run-up to Bulgaria's accession to the EU (planned for 2007), incomes and pay policy are in the spotlight. Since the early 1990s, the value of wages has fallen, and the level of the minimum wage has declined as a proportion of average pay. This article looks at developments over 2003-4 in areas such as the minimum wage, pay setting in the public and private sector, and the share of total incomes made up by wages.

Below we look at some basic features of wage setting in Bulgaria, and at pay developments over 2003-4.

Minimum wage

According to the Constitution of Republic of Bulgaria, workers and employees are entitled to a minimum labour remuneration, in accordance with conditions and procedures to be established by law. The minimum wage is determined by the government, in compliance with Article 244 of the Labour Code, and represents the lowest guaranteed remuneration for working hours of normal duration.

According to established practice, proposals for amendments to the level of the minimum wage are prepared by the Ministry of Labour and Social Policy and discussed by the social partners in the National Council for Tripartite Partnership (BG0307204F). Apart from the statutory national minimum wage, a higher minimum wage may be established by collective bargaining at sector and company level, All sectors negotiate minimum and starting wages, and around 52% of sectoral agreements provide for minima higher than those determined by law, with the agreed minimum rates being between 10% and 80% higher than the national minimum (BG0312203F).

During the years of Bulgaria's economic and political transition, the minimum wage has lost a major part of its purchasing power. The ratio between the minimum wage and the national average wage fell to 0.39 in 2003 from 0.54 in 1991. However, there has been a recent trend for the minimum wage to be increased at a rate higher than that of the average wage, with the aim of re-establishing the minimum wage's main function and bringing it nearer the actual price of labour. Since 1 January 2004, the national minimum wage has been set at EUR 61.5 per month.

Wage formation

Pay formation in organisations financed from the state budget in 2003 and 2004 is related to the growth rate of the Bulgarian economy, taking into account mandatory contributions (ie personal social and health insurance and income tax) and inflation. The increase in pay corresponds to the governments' budget resources for the relevant year. In 2003, pay in the state-financed sector ('budget wages') was increased twice - by 3.5% on 1 January and by the same amount again on 1 July. A differentiated approach is applied to employees in the education and health sectors, who have been awarded an accelerated increase in wages. The average annual wage for the budget-financed sectors experienced net growth of 6.2%. In 2004, a single increase in budget wages is planned, of 8.5% from 1 July. The Law on State Officials, amended at the beginning of 2004, introduced a new system for the formation of wages in the public administration, which takes into account to a greater extent the personal contribution of officials and seeks to guarantee fairer remuneration. It is hoped that this way of linking individual performance with pay will increase the motivation of state officials to work in a better and more efficient way. In order to provide a degree of protection and greater security, as well as with the aim of creating the conditions for growth in disposable incomes, in 2004 the current policy will continue, whereby officials' personal social and health insurance contributions are paid by the state budget.

In public sector 'economic organisations' (ie fully or majority publicly-owned enterprises), pay increases are currently tightly related to labour productivity and the financial status of the enterprises concerned. Over the past few years, particularly severe restrictions have been applied, in compliance with agreements with the international financial institutions, on commercial companies with a predominant state or municipal interest that have significant losses and outstanding liabilities, as well as on monopoly suppliers and budget-subsidised organizations.

The formation of wages in private sector enterprises is directly linked to increases in productivity and financial capacity, and is entirely at the employers’ discretion. The average wage of people in employment relationships in 2003 stood at EUR 145.6 per month - representing 4.4% net growth on the previous year. In 2004, it is predicted that the net growth in the average gross wage will be about 9%, bringing it to EUR 159 a month. The expected inflation for the year is 6.6%, and the increase in the average gross wage will thus be about 2.4%.

Public/private sector differentials

The official wage statistics show significant differences between the public and private sectors. The average wage in the public sector was about 38% higher than in the private for 2003. These differences are to a large extent thought to be due to the systematic concealment of the actual levels of wages in the private sector. Many private enterprises (mostly small and medium-sized ones) declare pay levels near to the official minimum wage for their employees, but actually pay higher remuneration (BG0307101F). The aim of the employers is, it is claimed, to reduce their tax and social insurance burden and thus cut labour costs. The effects of such practices are: unrealistic pay statistics; direct losses for the state budget and the social security funds, due to the lower contributions; and lower future pension entitlements for workers.

Income

Wages are the main element determining the structure of incomes of Bulgarian households. The share of wages in total incomes in 2003 stood at 40% and is expected to remain at the same levels in 2004. The relatively low relative share of wages in total incomes is a result of: high unemployment levels, with a rate of about 13%, (despite a decline in registered unemployment over the past two years); the country's significant number of pensioners; and increased entrepreneurial activity and a rising number of self-employed people.

Real wages are growing more slowly than labour productivity. The accelerated growth of labour productivity provides grounds to expect more encouraging trends in the development of the Bulgarian economy, and thus an increase in incomes, including wages.

Commentary

National incomes policy in the coming years will be formed to a large extent under the influence of the two key developments: Bulgaria’s accession to the EU (expected in 2007); and the resolution of various urgent problems of a long-term character. The government’s actions should be focused on a satisfactory solution of the main problem - ie overcoming the crisis in incomes and eliminating its accumulated negative economic and social effects. This may be achieved through a reformulation of the main priorities of wages policy and the establishment of adequate mechanisms guaranteeing that this area is subject to free market relations. It is necessary to take account of the specific features of incomes policy in the environment of exchange-rate arrangements and the forthcoming resolution of problems related to the terms of Bulgaria’s accession to the EU.

Bearing all these prerequisites in mind, the following should be the major priorities of incomes policy:

  • protection of all types of income and their progressive increase, within the available resources;
  • strengthening the economic and social function of the minimum wage;
  • linking wages to the economic and financial results (labour productivity); and
  • enhancing the social dialogue to solve pay problems.

The focus of the wages policy should be on the protection of the lowest-paid workers and a progressive increase in wages within the framework of the economic capacity. The low level of wages and the forthcoming accession of Bulgaria to the EU necessitate that this should becomes the top priority in the coming years. The major requirements are the protection of real wages from further decline and the progressive reinstatement of labour incomes to their level before they became eroded in the 1990s.

During the negotiation process over, and preparation of, Bulgaria’s EU accession, unrealistic goals should not be set regarding wages growth. In such a short period up until accession, it will be impossible to reach levels close to the current EU average. The goal is instead to establish conditions and mechanisms that can guarantee that, as a result of economic growth, the income of the various strata of society will grow. The establishment of such a favourable environment is related to a review of the mechanisms used for setting the minimum wage, agreeing wages in the private sector and determining wages in budget-financed organisations and the public administration. (Nelly Shtonova, Balkan Institute for Labour and Social Policy)

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