Three-year central agreement reached on minimum wage rises and pay policy guidelines

In late November 2005, the Hungarian social partners and government agreed on new minimum wage rates, the gradual introduction of a three-tier minimum wage system, and recommendations to lower-level negotiators on annual wage increases. The agreement includes not only increases and recommendations for 2006 but also a medium-term plan for minimum wage increases and pay policy guidelines over 2006-8.

An important element of the Hungarian industrial relations system is that the tripartite National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT) sets annually the national minimum wage and issues to lower-level bargaining parties a recommendation for wage increases. The annual round of negotiations between the government, employers’ associations and trade unions is one of the key fields for the social partners to influence macroeconomic and labour market processes (HU0502105F).

Economic and political background

The central pay negotiations for 2006 were driven by the Hungarian economy’s steady growth since the end of the 'transitional' recession. GDP grew by 4.6% in the third quarter of 2005, compared with the same period a year earlier. In the first 10 months of 2005, there was a 6.7% real wage increase, accompanied by greater spending on welfare allowances in 2005. Despite the rapid increase of real wages, the inflation rate dropped to 3.3% in December 2005, an important achievement after a decade of double-digit inflation rates. Nonetheless, the economic growth did not have a positive impact on employment. Compared with the same period a year earlier, the number of private sector jobs was unchanged in September 2005, while the number of employees in the public sector fell by 1%, to 810,700.

However, it is regarded as a serious warning sign that the economy is expanding at the cost of a rising public budget deficit. For 2005, the deficit, calculated on the basis of EU norms, is expected to amount to 6.1% of GDP, excluding pension reforms costs - which would represent an additional 1.0 or 1.5 percentage points - which is much higher than the original target deficit figure of 3.6%. The persistent failure to keep budget targets and non-transparent changes in accounting practices have somewhat eroded the credibility of fiscal policy and have led to Hungary’s downgrading by important foreign financial agencies.

The controversial economic trends of 2005 were, according to commentators, a product of the sharp race between the governing left-liberal coalition parties and the right-wing opposition parties preparing for the elections due in late spring 2006. The government - following the traditional cycle of the Hungarian political economy - allowed its spending to grow and avoided any unpopular measures from as early as in 2005, observers argue. The perceived populist policy of the right-wing opposition party, which demanded more welfare measures and at the same time the reduction of the budget deficit and tax cuts, made it even more difficult for the government to meet the strict fiscal harmonisation requirements of joining the euro-zone, according to commentators. Under the convergence programme, Hungary must reduce its budget deficit to less than 3% by 2008 in order to meet the Maastricht criteria to join the euro-zone in 2010. The persistent budget deficit, however, has forced the government to amend the programme. The new programme aims for a 5.0% deficit in 2006, 3.9% in 2007 and 2.8% in 2008. Leading economists have questioned the viability of entry in 2010 and suggested that Hungary is not likely to adopt the euro until after this date.

Government reform initiatives on minimum wage setting

The tone for the 2006 negotiating round was set by the government in June 2005 with its announcement of a plan to introduce a new three-tier minimum wage scheme (HU0506101N). The plan includes separate minimum wage levels for: jobs requiring higher education; jobs requiring secondary education or vocational training; and all other jobs. The government also announced that in the future the minimum wage increase would be tied to the subsistence level calculated by the Hungarian Central Statistical Office (Központi Statisztikai Hivatal, KSH). Accordingly, for 2006 it supported an increase in the minimum wage from the previous HUF 57,000 (EUR 230) monthly level to HUF 63,000 (EUR 254) - a little higher than the HUF 61,700 subsistence level - and proposed a rate 10% higher (HUF 70,000) for jobs requiring at least a vocational school qualification, and another 10% higher (HUF 77,000) for jobs requiring a higher education degree. The setting of the higher rates, however, would be completely the responsibility of the tripartite forum. According to calculations, the proposed new tiers would increase the monthly income of half a million employees, among them 20,000 with a university degree.

Somewhat later, the Ministry of Finance recommended a scheme of minimum wage increases for the period up to 2010, by which time the monthly rates would be HUF 90,000, HUF 100,000 and HUF 110,000 for the three brackets. Parallel with this, for 2006 the government suggested a 4% average nominal wage increase recommendation, amounting to a 2% real wage increase, given the forecast 2% inflation rate. Another front for the 2006 negotiations was opened by the government’s announcement of a five-year tax reduction plan. To simplify the personal tax system, in 2006 there will be only two brackets, a 18% rate for annual incomes of HUF 1,550,000 (EUR 6,254) or below, and a 36% rate for all income higher than that level. Furthermore, the rate of VAT will be reduced from 25% to 20% (HU0507101N).

Social partners’ positions in annual bargaining round

Officially, negotiations on the minimum wage increase and on the recommendation for wage increases in 2006 began at the 7 October 2005 meeting of OÉT. First, the Council evaluated the implementation of the agreements reached for 2005 (HU0501102N). All parties agreed that implementation was duly carried out, which was a good start, not complicating the negotiations with the issue of compensation, unlike on many earlier occasions. Nonetheless, the employers’ side warned that the real wage increase in 2005 was higher than the growth in GDP - a development which, if it becomes a trend, may undermine the competitiveness of the Hungarian economy in the long run.

As for the initial bargaining positions for 2006, the government proposed to develop a common understanding concerning long-term wage development, emphasising that real wage development should be in harmony with job creation and the growth of productivity. The employers' side, while welcomed the government proposal, underlined that a real wage increase should be achieved via tax cuts rather than a nominal wage hike.

While the three-tier minimum wage system had long been demanded by trade unions, especially the National Association of Hungarian Trade Unions (Magyar Szakszervezetek Országos Szövetsége, MSZOSZ), MSZOSZ criticised the government proposal for making the differentials between the various minimum wage levels too small. Furthermore, unions demanded that the minimum wage level be set at 60% of the current average wage level, which would make the minimum wage higher than the government’s offer. MSZOSZ, however, would settle for a HUF 65,000 basic monthly minimum wage level for 2006, a little more than the government’s proposal, and HUF 81,250 and HUF 97,500 for the other two minimum wage categories. According to MSZOSZ, HUF 65,000 per month is exactly the subsistence level. Of the nationally representative trade union organisations, only the National Federation of Workers’ Councils (Munkástanácsok Országos Szövetsége, MOSZ) maintained that minimum wage level should be set at the 60% of average wage, ie HUF 78,200 in 2006.

Employers opposed the idea of the three-tier minimum wage level tied to education level because, on the one hand, it would the reduce the competitiveness of industry and, on the other hand, it would be difficult to implement and control such a regulation. Similarly, economists and various financial analysis institutions warned that such a measure would affect negatively the competitiveness of the Hungarian economy, harm job creation, especially in the small-sized domestic enterprise sector, and further increase regional differentiation.

The long-term proposal of the government to raise the minimum wage by an automatic mechanism was rejected by the social partners, which feared losing a very important tool in guiding labour market processes.

As for the proposed annual wage increase, unions argued that employees should have a real wage increase in line with the forecast 4% GDP growth. MSZOSZ demanded a 6.5% nominal wage increase. MSZOSZ criticised the government’s tax-reduction plan too, as the new system, taking into account a 2% real wage increase for 2006, would mean an only 0.8% tax reduction for low-wage earners, and a 3.5% tax reduction for those earning an annual income of HUF 4,000,000 (EUR 16,000) or more. MSZOSZ rejected the idea of a two-bracket taxation system and wanted instead four brackets, so as to be able to tax high-income groups appropriately. Parallel with this, the union confederation demanded an increase in the value of non-taxable fringe benefits.

Employers’ associations and trade unions agreed that the tax cut should be concentrated on reducing tax levies on employment rather than on reducing VAT.

As for the government, it proposed a 3.5%-4.0% nominal wage increase, which would take into account the impact of tax reduction due to the introduction of a two-tier tax system and the reduction of VAT. The government argued that a lower real wage compared with GDP growth would help job creation and ensure meeting the planned 2% inflation level. Unions said that they could not see a link between lower wage increases and job creation and demanded a 4% real wage increase plus, accepting the 2% inflation projection, a 6% gross wage increase.

Employers’ organisations warned that the proposed 9% minimum wage increase would be well above the projected 2% inflation rate and 4% GDP growth rate and would hit employment especially hard in the small and medium-sized enterprise sector and in low-technology labour-intensive manufacturing sectors, such as the textiles, clothing and furniture industries. Employers made it clear that they would not support any increase beyond the government's proposal.

As negotiations dragged on, the government warned that if the social partners could not agree by end of November it would set the minimum wage unilaterally, submitting a bill on the issue to parliament. Eventually, at its 28 November meeting OÉT agreed on the minimum wage increase and wage recommendation for 2006. The government withdrew the bill on minimum wages it had already submitted to parliament.

National agreement

The agreement reached on 28 November 2005 includes four elements: the minimum wage increases for the years 2006-8; the introduction of a three-tier minimum wage; guidelines for wage negotiations in the forthcoming period; and the recommended wage increase for 2006.

Minimum wages

The tripartite OÉT agreed on the following (basic) monthly national minimum wage rates:

  • HUF 62,500 (EUR 242) from 1 January 2006;
  • HUF 65,500 (EUR 264) from 1 January 2007; and
  • HUF 69,000 (EUR 278) from 1 January 2008.

OÉT agreed on a higher minimum wage rate for jobs requiring a secondary school or vocational training qualification, as follows:

  • between 1 January 2006 and 30 June 2006, a minimum wage 5% higher than the national minimum is recommended for employees in such jobs who have under two years' experience in the given occupation, and 10% higher for those with at least two years' experience;
  • between 1 July 2006 and 31 December 2006, a minimum wage 5% higher than the national minimum must be paid to employees in such jobs who have under two years' experience, and 10% higher for those with at least two years' experience;
  • between 1 January 2007 and 31 December 2007, a minimum wage 10% higher than the national minimum must be paid to employees in such jobs who have under two years' experience, and 15% higher for those with at least two years' experience; and
  • between 1 January 2008 and 31 December 2008, a minimum wage 20% higher than the national minimum must be paid to employees in such jobs who have under two years' experience, and 25% higher for those with at least two years' experience.

For employees in such jobs who are older than 50 years, the higher of these two new minimum wage rates is mandatory, regardless of the length of their professional experience.

OÉT has allowed sectoral collective agreements both to reduce this premium to the level of the national minimum wage and to increase the minimum wage levels to a higher agreed level.

Furthermore, OÉT recommends the following minimum wage rates for employees working in jobs that require a university-level education:

  • in 2006, 40% higher than the national minimum wage;
  • in 2007, 50% higher than the national minimum wage; and
  • in 2008, 60% higher than the national minimum wage.

Wage increases

OÉT agrees that the driving force of wage harmonisation between Hungary and the EU is sustained, stable and fast economic growth, and that wage harmonisation and job creation are equally important goals. It is thus in the common interest of the social partners and the government to allow wages rise in a way that harmonises real wage increase with job creation and the improvement of productivity, and thus facilitates a sustained, stable and foreseeable economic development.

OÉT recommends a 4.0% to 5.0% gross wage increase in the competitive sphere of the economy in order to achieve a 3.5% real wage increase. This calculation is based on the government forecast of a 4.0% GDP increase, a 0.5% to 1% increase in employment, a 3.0% to 3.5% increase in productivity, tax cuts leading to a 1.0% to 1.5% net real wage increase, and a 2% inflation rate.

Comments on the agreement

The Alliance of Young Democrats-Hungarian Civic Party (Fiatal Demokraták Szövetsége - Magyar Polgári Szövetség, FIDESZ-MPSZ), the major opposition party, criticised the agreement as it raises the minimum wage at a lower rate than under the earlier FIDESZ administration.

Although three employers’ associations (HU0512103F) - the Confederation of Hungarian Employers and Industrialists (Munkaadók és Gyáriparosok Országos Szövetsége, MGYOSZ), which is the major association of large and medium-sized companies, the National Federation of Agricultural Cooperatives and Producers (Mezőgazdasági Szövetkezők és Termelők Országos Szövetsége, MOSZ), one of the major representative of the agricultural sector, and the National Federation of Craftsmen Boards (Ipartestületek Országos Szövetsége, IPOSZ), one of the most important associations of small enterprises - did not agree with the increases, they waived their veto right. As the representative of MGYOSZ explained, the minimum wage is too high for Hungarian companies, but these organisations decided to accept the agreement in the hope that, through sector-level agreements, employers can achieve lower minimum wage levels in low-wage, low-skill sectors.

At the OÉT meeting the Prime Minister stated that this medium-term agreement represents a new phase in the history of social dialogue in Hungary and underlined the successful approximation of Hungary to European standards in terms of wages, with those in Hungary growing faster than in the older Member States of the EU. The accumulation of resources will make the economy attractive for new foreign investors, he argued. Furthermore, the agreement can serve as the basis for a long-term understanding between the partners in the tripartite forum as well as for a wider social pact to be concluded by the Economic and Social Council (Gazdasági és Szociális Tanács, GSZT).

Commentary

The agreement concluded at the tripartite forum is undoubtedly a landmark: the social partners and the government agreed on the calculation of the minimum wage, introduced a new three-tier minimum wage system, and agreed on the concept of wage recommendations. The agreement includes not only the figures for 2006, but also a medium-term schedule of minimum wage increases and wage policy guidelines for the period 2006-8.

The agreement was of paramount importance for the government. On the one hand, it demonstrates that social dialogue is working well, and on the other hand it serves to develop long-term programmes. Trade unions were able to translate their longstanding demands into a government programme, and at the same time lowered their wage demands compared with their standpoint a few years ago. when they insisted that real wage increases should be higher than the GDP growth (HU0310104S). Employers had to make some concessions to labour too.

This long-term agreement and the seemingly moderate position of the unions herald a 'clandestine social pact' that corresponds to the long-term strategy of the government. Given the highly cyclical nature of Hungarian politics, however, it is a question whether after the 2006 general elections the new government will be able to follow this path. Should a new government come to office, a new round of negotiations will probably be started; if the present government remains in power, the major challenge will be whether the necessary steps in order to meet the strict requirements of euro-zone entry allow it to continue the ambitious wage harmonisation programme endorsed by OÉT. (András Tóth and László Neumann, Institute of Political Science, Hungarian Academy of Sciences)

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