Social partners agree on minimum wage increase

In late June 2007, the government approved the regular increase of the monthly minimum wage to €227, along with an increase of the tax-free threshold to €114. The changes were adopted by the social partners at the National Tripartite Cooperation Council meeting on 20 June 2007 and will take effect as of 1 January 2008. Businesses and local authorities have raised concerns about the minimum wage increase, stating that it will lead to higher employment costs and reduced competitiveness.

On 20 June 2007, at the meeting of the National Tripartite Cooperation Council (Nacionālās trīspusējās sadarbības padome, NTSP), the social partners agreed on the regular increase of salary standards. The social partners with equal representation at the NTSP included the government, the Latvian Employers’ Confederation (Latvijas Darba Devēju konfederācija, LDDK), the Free Trade Union Confederation of Latvia (Latvijas Brīvo Arodbiedrību savienība, LBAS) and the Latvian Association of Local and Regional Governments (Latvijas Pašvaldību savienība, LPS).

New minimum wage provisions

At the NTSP, the social partners agreed that, as of 1 January 2008, the monthly minimum wage will be raised to €227 from the current amount of €170. Moreover, the tax-free threshold will be increased from €71 to €114, while tax relief for dependent persons is set to rise from €45 to €80 (LV0702019I). These increases represent the largest growth in salary standards in recent years. On 26 June 2007, the government accepted the NTSP proposals.

Current wage levels

Eurostat data reveal that Latvia has the third lowest monthly minimum wage among the EU countries – only Romania and Bulgaria have lower salaries. In May 2007, the monthly ‘living wage’ (wage sufficient to meet the basic needs of a worker and their dependants) in Latvia amounted to €185.20. The average gross monthly salary in Latvia in the first quarter of 2007 was €507.

According to data from the Central Statistical Bureau of Latvia (Centrālā Statistikas pārvalde, CSP), 12.5% of workers received a net monthly wage of less than €155 in their main job during the first quarter of 2007 – this amount is close to the current minimum wage. Almost 30% of workers received a monthly wage that was lower or only slightly higher than the living wage in their main job.

Social partner demands

The minimum wage and the tax-free threshold were the key points of discussion at the NTSP. In addition, the trade unions are continuing to call on the government to introduce wage increases. LDDK supports both the increase of the tax-free threshold and the minimum wage, considering that it facilitates fair competition. The confederation also aims to achieve an increase of the tax-free threshold to 60% of the minimum wage. Moreover, LDDK believes that, once the tax-free threshold is increased, it will become less advantageous for employers, when assessing all gains and risks, to employ workers illegally and pay them undeclared wages to evade taxes. The Ministry of Welfare (Labklājības ministrijas, LM) also considers it a necessity to increase minimum wage standards.

Opposition to further wage increases

Businesses, however, have raised concerns about the regular increase of the minimum wage. Employers consider that significant increases of the minimum wage will result in an additional burden for their businesses and will lead to bankruptcy for many companies. Representatives of foreign investors believe that it is necessary to increase salaries, but not at present, since a downward trend is expected in the economy. Moreover, employees have high wage demands due to increased emigration.

The heads of local authorities have similar opinions, as many workers in such institutions are recipients of minimum wages.

Commentary

Experts consider that, in the future, such an increase in minimum wages could prove too risky if it is not matched by an increase of productivity. According to a report by the Ministry of the Interior (Iekšlietu ministrija, IeM) on attracting foreign labour, productivity levels in Latvia equalled 47.8% of the average EU level in 2004, while this figure increased to 50.5% in 2006. Labour costs in Latvia are increasing rapidly, namely by 10%–20% annually since 2003; moreover, in 2006, labour costs increased by 19%–29% in each quarter compared with the respective quarter of the previous year. During the first quarter of 2007, compared with the respective period in 2006, labour costs increased by 34.6%. Thus, the rising labour costs have led to a loss of competitiveness for Latvian companies.

On the other hand, the number of minimum wage recipients is not large enough to cause problems for employers. Moreover, the increased tax-free threshold will mitigate the effect of the rise in the minimum wage.

Raita Karnite, Institute of Economics, Latvian Academy of Sciences

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