Rise in minimum wage and tax-free threshold

Since 1 January 2007, the minimum wage in Latvia has been raised by 33% from €128 to €170 a month. In addition, the monthly tax-free threshold and the tax allowance for calculating personal income tax have also been increased. The issue of increasing the minimum wage and the tax-free threshold has been a constant focus of the trade unions. As the country’s labour market situation is becoming more difficult, employers are also starting to support moves to increase the minimum wage and tax-free threshold.

Minimum wage increase

On 17 November 2006, the Cabinet of Ministers (Latvijas Republikas Ministru kabinets) adopted Regulation No. 858, providing for the largest increase in the minimum wage since 1990 (LV0607029I). A number of months later, on 1 January 2007, the minimum wage was increased by 33% from €128 to €170 a month.

Since 1 January 2007, the minimum hourly rate has been raised to €1 for adults and to €1.16 for teenagers. The hourly rates for adults and teenagers differ because the Labour Law insists on shorter working hours for teenagers of a maximum of 35 hours a week. Moreover, it requires that the minimum wage for all workers must be equal, irrespective of the permitted number of working hours stipulated under the law. In line with this principle, in 2007, the minimum hourly rate of €1.16 will also apply to workers subject to special risks, whose normal working time is seven hours a day and 35 hours a week.

Increase in monthly tax-free threshold

On 6 November 2006, the Cabinet of Ministers adopted Regulation No. 918, setting out the provisions for the monthly tax-free threshold and for tax relief when calculating personal income tax. Since 1 January 2007, the monthly income tax-free threshold has been increased from €45 to €71. Tax relief for dependent persons stipulated under the law ‘on personal income tax’ has been raised from €31 to €45.

Involvement of social partners

Latvia’s minimum wage has been increased in line with the schedule provided for under the ‘Framework for increasing the minimum wage’, which was adopted in May 2003. This framework was based on a cooperation between the tripartite social partners. The framework anticipates a gradual increase in the minimum wage, with the aim of reaching 50% of monthly average gross wages by 2010.

The social partners are carefully monitoring the implementation of the latter framework agreement. Raising the minimum wage and income tax threshold constitutes the main area of activity for the trade unions. Nonetheless, as emigration and the country’s labour shortage continue, the Latvian Employers’ Confederation (Latvijas Darba Devēju konfederācija, LDDK) is also lending its support to an increase in the minimum wage and income tax threshold.

Up until now, the government had been unable to fully implement the conditions of the framework agreement; as a result, there was no improvement in the relationship between the minimum wage and the average monthly gross wage. Since the average gross wage rose by over 23% in 2006, the minimum wage fell – in comparison with the average wage – from 33.4% in the first quarter of 2006 to 29.7% in the fourth quarter of 2006. This explains the rapid growth in the minimum wage in 2007. The current minimum wage level does not exceed 40% of the average gross wage at the end of 2006. It is anticipated that, in 2007, average gross wages will continue to rise and that the comparative relationship will worsen again.

The government had planned to increase the minimum income tax threshold and tax relief for dependent persons to €56 and €39 respectively. However, the National Tripartite Cooperation Council (Nacionālās trīspusējās sadarbības padome, NTSP) adopted a decision to increase both concessions more rapidly (LV0610019I).

Commentary

The Latvian government’s main objective is to bring the minimum wage level closer to the standard set out in the European Charter. In accordance with the latter, the minimum income level for workers must be 66% of the national income per head of population, or 68% of the national average wage. Achieving this goal is not easy, however, since average wage levels are growing rapidly. The increases in both the minimum wage and the monthly tax-free threshold place additional pressures on state expenditure and local government budgets; therefore, the government is carefully considering moves to raise both benchmarks.

Raita Karnite, Institute of Economics, Latvian Academy of Sciences

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