New rules for adjusting national minimum wage

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In July 2005, the lower house of the Polish parliament approved new rules for adjusting the national minimum wage, whereby it will increase by forecast inflation plus two-thirds of the GDP growth rate, until it reaches half of the national average wage. Trade unions are pleased with the decision, but employers' organisations are opposed, arguing that it will only foster high unemployment. At the same time, the government is seeking to introduce an alternative scheme whereby the net value of the minim wage will be increased by cuts in tax and social contributions.

The current statutory minimum wage system has been in force since 2002, when the Minimum Wage Act was passed (PL0211109F). The Act regulates the minimum legal remuneration, the rules for setting the amount, and reduced rates for new employees (workers are entitled to 80% of the minimum in the first year of employment, and 90% in the second year).

The Act provides that the minimum wage should be set with reference to the forecast annual average prices index increase for the following year announced by official statistical office. If the inflation forecast is lower than 5%, the minimum wage is to be uprated once a year. If it is higher than 5%, the minimum wage is to be raised twice a year. The inflation forecast constitutes a point of reference for the government, which is obliged to present the Tripartite Commission for Social and Economic Affairs (Komisja Trójstronna do Spraw Społeczno-Gospodarczych) (PL0210106F) with a proposal for minimum wage increases for the following year by 15 July every year. If the Commission fails to reach agreement during the two following months, the government has a right to set the minimum wage rise itself (PL0410101F).

The initial rate of the minimum wage in 2002 was PLN 800 per month. At present, the gross monthly minimum wage is PLN 849 (EUR 210). It currently constitutes 35% of the national average wage.

The rules for adjusting the minimum pay rate may now be changed. In early July 2005, the lower house of parliament (the Sejm) voted in favour of a new mechanism, whereby the minimum wage will each year increase by forecast inflation, plus two-thirds of the GDP growth rate, until it reaches 50% of the national average wage. These new rules would mean a monthly increase of PLN 40 in the current minimum wage rate.

All parliamentary groups voted in favour of the July amendment to the Minimum Wage Act, except the liberal Civic Platform (Platforma Obywatelska, PO). The advocates of the amendment argue that raising the minimum wage will motivate jobless people, as there will be a more significant difference between the minimum wage and unemployment allowances. Moreover, they claim that the population’s increased purchasing power will boost domestic demand. The amendment’s opponents maintain that it will have adverse effects, and will lead to a further deterioration in the labour market situation.

Social partners’ views

Trade unions are pleased with the change to the rules for adjusting the minimum wage, while employers’ reactions have been rather hostile. The unions point to the gap between the minimum wage and the national average wage as sufficient justification for parliament’s decision. Employers expect that the pay increase caused by the amendment will bring about a growth in unemployment, and will mostly affect small companies and micro-enterprises, which will not be able to bear the burden of increased pay, and as a result will have to make workers redundant. The positions of the main social partner organisations are as follows.

  • The Independent and Self-Governing Trade Union Solidarity (Niezależny Samorządny Związek Zawodowy Solidarność, NSZZ Solidarność) believes that the adopted amendment is a good move.
  • The All-Poland Alliance of Trade Unions (Ogólnopolskie Porozumienie Związków Zawodowych, OPZZ) has long called for changes to the minimum wage adjustment rules, and its parliamentarians took an active part in preparing the amendment. The OPZZ-associated Nowy Tygodnik Popularny weekly wrote in early July that 'the increase in domestic demand, which the amendment would inevitably cause, could be reviving for Poland’s economy'. It recalled that OPZZ 'had fought a long battle for this law, which will be a blessing to the poorest'.
  • The Trade Union Forum (Forum Związków Zawodowych, FZZ) believes the gap between the minimum wage and the national average wage should be bridged. Parliament's decision was therefore in line with FZZ’s position and expectations. FZZ, along with other trade unions, stresses that the minimum wage increase would stimulate the economy, because it would boost people’s purchasing power.
  • The Polish Confederation of Private Employers Lewiatan (Polska Konfederacja Pracodawców Prywatnych 'Lewiatan', PKPP), voiced the loudest discontent at the changes, and spoke of dangers the amendment would bring about, stressing that the rise in the minimum wage would provoke a much higher increase in charges on employers, which have to cover the 'double costs' of employment. As a consequence - PKPP stated - the new regulations would hinder the already disadvantaged groups on the labour market, such as the young and people with low skills.
  • The Confederation of Polish Employers (Konfederacja Pracodawców Polskich, KPP) was critical of the amendments. In a statement, KPP said that 'the new law will cause additional growth in the tax wedge, and will push up unemployment and spread tax evasion'.
  • The Polish Craft Association (Związek Rzemiosła Polskiego, ZRP) is an organisation that organises mostly micro-enterprises, and is very concerned that the minimum wage should rise only moderately. Pay matters are a factor of critical importance to those entrepreneurs who employ no more than few workers that make up most of ZRP's members.

Employers in favour of measures to increase net pay

The employers' organisations are more inclined to accept measures relating to increasing workers' net pay that have been proposed by the government under the form of an 'activation relief'. This would consist of a partial or total exemption of workers on the minimum wage from tax and health insurance charges. Thanks to this relief, these workers' gross pay would remain the same, and therefore employers would not have to finance the net pay increase. The introduction of this relief would be coupled with freezing the minimum wage over 2006-7. However, this solution has caused doubts, even in the government itself, as it might reduce public tax income. In spite of this, the government is pursuing the draft amendment and wants it to be passed by parliament.

The KPP employers' organisation 'calls for raising the net minimum wage, by reducing the tax wedge and lowering the minimum pay costs by applying the activation relief'. PKPP is also keener on the 'activation relief' concept. Trade unions too regard this solution with interest.

The lower house's amendment to the minimum wage legislation may be modified by the Senate, and even if the upper house of parliament does accept the draft amendment as it is, it can be referred back or totally rejected by the President.

Commentary

There is a clear-cut division between employers and trade unions when it comes to evaluating the changes to the minimum wage adjustment rules. The two sides’ arguments are coherent and hard to dispute, because on the one hand - as the trade unions point out - the relative minimum wage level in Poland is indeed very low in comparison to average wage and the 'social minimum' level. On the other hand, the employers’ anxiety about businesses’ capability to shoulder the burden of the changes is justifiable, as the amendment will impose higher labour costs. Ultimately, the debate is about the old, but still unsolved, issue of elevated costs of employment and labour, which is commonly believed to represent the greatest obstacle to the creation of new jobs. (Jan Czarzasty, Institute of Public Affairs [Instytut Spraw Publicznych, ISP] and Warsaw School of Economics [Szkoła Główna Handlowa, SGH])

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