Impact of changes to minimum wage

The minimum wage in Slovakia was increased from SKK 6,500 to SKK 6,900 monthly (SKK 39.70 per hour) on 1 October 2005. It represents an increase of 6.2% compared to 2004. The minimum wage is a point of reference for more than forty pieces of legislation, and therefore changes in the minimum wage will affect not only those in receipt of the minimum wage but also other workers and recipients of certain social security benefits. Some employers want it ended in its present form. A special tripartite expert working group is examining the possibility of changing the method of setting and modifying the minimum wage and severing its connection to other laws.

Increase in national minimum wage

The ordinance of the Slovak government No. 428 of 14 September 2005 increased the gross monthly minimum wage by SKK 400 from 1 October 2005. The monthly minimum wage is now SKK 6,900 or SKK 39.70 per hour. The Government based its decision on the provisions of Act No. 90/1996 on the minimum wage as amended whereby the Government increases the minimum wage on 1 October each calendar year.

In June 2005, the Ministry of Labour, Social Affairs and Family (Ministerstvo práce, sociálnych vecí a rodiny Slovenskej republiky, MPSVR SR) submitted, in line with the above Act, for the negotiation at the tripartite Economic and Social Partnership Council (Rada hospodárskeho a sociálneho partnerstva, RHSP) a proposal for the minimum wage index (SK0210101N) in the value of 0.43, which corresponds to the gross monthly minimum wage of SKK 6,800 (SKK 39.10 per hour). However, at its meeting of 24 June 2005, the RHSP failed to reach an agreement on the proposal. The Confederation of Trade Unions (Konfederácia odborových zväzov Slovenskej republiky, KOZ SR) sought a higher index, 0.46, corresponding to a gross monthly minimum wage of SKK 7,280. The Federation of Employer Associations (Asociácia zamestnávateľských zväzov a združení Slovenskej republiky, AZZZ SR) proposed a much lower monthly figure of SKK 6,650. AZZZ SR also sought the establishment of an expert working group to devise a new method of setting the minimum wage in 2006. The National Union of Employers (Republiková únia zamestnávateľov Slovenskej republiky, RUZ SR) considers indexing to be flawed, as it takes no account of the real development of wages in Slovakia, results in increased contributions to insurance funds and prohibitive labour costs for small and medium sized enterprises. Therefore RUZ SR wants an end to the minimum wage in its present form. The government representatives in the RHSP supported the proposal submitted by MPSVR SR. The RHSP chairman, the minister for the economy, Pavol Rusko also agreed with the AZZZ SR proposal to establish an expert working group. He made the MPSVR SR responsible for its operation, but ruled iut ending the minimum wage.

Following the failed negotiations, the MPSVR SR again put forward its proposal for a monthly minimum wage of SKK 6,800 and this was discussed at RHSP on 15 August 2005. KOZ SR reiterated its opposition to the proposal. The trade union representatives again sought to have the value of the index raised to 0.46, although this would not be sufficient to raise the minimum wage to 60% of the average monthly wage in Slovakia, which, in line with the European Social Charter, is their ultimate objective. Therefore they expressed their criticism of the index proposed by MPSVR SR, as it would result in the minimum wage falling behind as a share of the minimum wage (39.53% in 2005 compared to 41.07% in 2004). RUZ SR repeated its opposition to the minimum wage in its present form, insisting that it is an obstacle to the employment of unskilled workers, particularly in labour-intensive sectors. AZZZ SR representatives proposed that in addition to devising a new method of setting the minimum wage, the expert working group should ensure that it ceased to be linked to other legislation.

While the social partners failed to reach agreement in August, they were urged to continue negotiations. A ceiling of SKK 7,000 was set on the monthly minimum wage and 19 August 2005 was selected as the deadline for signing an agreement. KOZ SR and AZZZ SR agreed on a monthly minimum wage of SKK 6,900 while RUZ SR, sticking to its original position, took no further part in negotiations. Agreement on the level of the index was not reached and the government decided to set the minimum wage at SKK 6,900.

The new gross minimum wage of SKK 6,900 is SKK 1,438 higher than the gross subsistence minimum (SKK 5,462 since 1 July 2005). Compared to 2004, the gross minimum wage has increased by 6.2% and the net minimum wage by 6.1%. The gross minimum wage represents 40.12% of the average monthly wage forecast for 2005. The net minimum wage (for an adult with no children) is SKK 5,975, representing approximately 126% of the net subsistence minimum of an adult (SKK 4,730).

Impact of the minimum wage on other legislation

The minimum wage has an effect on 41 laws (40 acts and 1 decree), as follows:

  • The law concerning wages (in nine acts). The minimum wage represents a lawful guarantee of the lowest labour income and wage replacement of employees, it is a point of reference, e.g. for determination of financial reward for specific work and activities.
  • Social security law (in eight acts). The minimum wage is a point of reference, e.g. for compulsory social insurance, material need assessment, for entitlement to receive 'activation allowance' for the long-term unemployed, for determination of minimum level of income replacement for selected groups of civil servants.
  • Law concerning health care insurance (one act). The minimum wage is a point of reference for establishing the minimum assessment basis for paying compulsory insurance in some instances as determined by law.
  • Law aimed at support of employment (in one act and one decree). The minimum labour cost is a point of reference for determining different types of allowances paid in the frame of active labour market policy.
  • Law concerning receipt of financial benefits and reimbursements (in two acts). The minimum wage is a point of reference, e.g. for entitlement to tax bonus, for some financial reimbursements while working abroad.
  • Law concerning classification of criminal acts, offences and damages (in five acts). The minimum wage is a point of reference for the determination of financial penalties and for fulfillment of certain clearly defined legal responsibilities, e.g. in connection with car accidents.
  • Law concerning legal proceedings (in five acts). The minimum wage is a point of reference for determining financial fines and other legal costs.
  • Law concerning restitution by the state (four acts). The minimum wage is a point of reference, e.g. for determining the value of compensation for injuries caused during the course of their work by judges, attorneys etc, for determining payment of criminal compensation to victims of violence.
  • Law concerning property (two acts). The minimum wage is a point of reference for the declaration of certain property relationships of public officers and for proof of title.
  • Other laws (three acts). The minimum wage is a reference guide, e.g. for proving of financial provision of a foreigner crossing the border or for granting of student loans.

The list shows that any change in the minimum wage has an impact on public expenditure as well as on the labour cost of the self-employed and other workers. While the increase in the minimum wage has a direct impact on approximately only 1-2% of employees (no precise data are available), its overall impact will be felt at a much wider level.

Views of the social partners

Some employer representatives who oppose increases in the minimum wage, as well as those (especially RUZ SR) who want it abolished, cite the fact that the minimum wage has an effect not only on the labour cost of employees receiving the minimum wage but also on the labour cost of other workers and also upon the tax burden of employers. Some employers particularly dislike Section 120 of the Labour Code that deals with safeguarding the minimum wage entitlement of employees who are not party to collective wage agreements. In this instance the hourly rate is graded according to the demand for labour in particular jobs, resulting in six grades from 1 : 0 to 2 : 0. RUZ SR representatives claim that minimum wage requirements contribute to higher insurance contributions and acts as an incentive to the black economy. While they would favour the abolition of the minimum wage, they acknowledge that the Slovak republic is bound by ILO Conventions it has ratified. However, they propose:

  • legislation to eliminate the relationhips between the minimum wage and other laws in Slovakia;
  • the repeal of Section 120 of the Labour Code;
  • an end to political influence in determining the minimum wage and the provision of more time to conduct negotiations;
  • in calculating the value of the minimum wage, to examine its impact on enterpreneurship, national competitiveness, the state budget, compulsory contributions to insurance funds and taxation.

Representatives of AZZZ SR do not seek to get rid of the minimum wage. However, in their opinion, the minimum wage system hampers the flexible use of a cheap labour force and therefore they want it changed.

KOZ SR wants the minimum wage preserved. However, its representatives favour a thorough analysis of its impact and propose:

  • a survey of laws connected with the minimum wage;
  • a modification of the uprating mechanism according to the Act No. 90/1996;
  • to move the effective date of the government decree that defines the value of the minimum wage from 1 October to 1 January of the calendar year.

A survey of the laws and their analysis is presented in the study (Barošová, M.: Analýza právnych predpisov s väzbou na minimálnu mzdu. Centre for Work and Family Studies, Bratislava 2005), commissioned and financed by MPSVR SR which provided the study to the relevant members of the tripartite expert working group dealing with the minimum wage at the end of August 2005. In October, based on the conclusions of the expert working group concerning possible changes in the minimum wage, the representatives of the social partners submitted to the head of that working group their proposals for modification of laws related to the minimum wage.

KOZ SR considers it important to retain the minimum wage in laws dealing with remuneration, determination of the income replacement and active labour market policy measures. It proposes that in the acts on social and health insurance and in some other acts the minimum wage should be substituted by other points of reference, e.g. by a fixed rate, average wage or subsistence minimum. RUZ SR proposes abolishing the relationship of the minimum wage to other legal regulations and proposes to substitute it with other points of reference, e.g. minimum subsistence levels, average wages, eventually by a fixed rate, and these changes should cover the determination of the assessment basis for compulsory contributions to insurance funds, values of income replacement, sanctions and restitution, determination of marginal values for determination of certain responsibilities, classification of criminal acts, offenses and damages etc. The Slovak Association of Small Enterprises (Slovenská asociácia malých podnikov, SAMP) seeks an end to the minimum wage. Its representatives argue that the relationship of the minimum wage to other acts creates excessive financial burden for small enterprises -mainly in relation to the minimum assessment basis for compulsory contributions to different insurance funds as well as certain problems in accountancy. According to the president of SAMP, Vladimír Sirotka, permanent pressure to increase the minimum wage could have a negative impact on employment growth and stimulate undeclared work. SAMP proposes that if the minimum wage is preserved, the relationship between it and compulsory payments to social and health insurance funds should be ended. SAMP also proposes that the determination of the value of the minimum wage should be primarily the responsibility of the social partners and should be based mutual agreement.

Commentary

The expert working group continues in its work and its establishment can be viewed as a positive development. A forum exists for resolving the problems identified in the operation of the minimum wage although the working group’s recommendations are unlikely to be implemented in 2006, when a general election will be held. And it is important that the discussions involve not only politicians but also representatives of employers and employees as well as relevant representatives of the state administration, experts and also academics. (Margita Barošová, Bratislava Centre for Work and Family Studies)

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