Government raises minimum wage

The minimum wage in Latvia will rise for the first time in three years from the beginning of 2014. The increase comes after negotiations between the country’s social partners. The Cabinet of Ministers agreed on 11 June 2013 on a rise from LVL 200 per month to LVL 225, confirming an agreement reached with the social partners at the National Tripartite Cooperation Council meeting earlier in June. The last time the minimum wage increased was on 1 January 2011.

Background

The Latvian government announced in March 2011 that the minimum wage would be set ‘according to the country’s economic situation’ (LV1108019I, LV1303029Q). It was also agreed that the level of the minimum wage would be decided annually after negotiations with the social partners.

The 2011 ruling meant the minimum wage was not tied to specific indicators, but adjustments would take into account national economic trends.

Since then, the government has rejected all union requests for an increase in the minimum wage because of the unfavourable economic situation. Employers have also kept a close watch on salary rises and have objected to increases over the past two years. Nevertheless, employers understand and feel the effects of inordinately low salaries in Latvia. They realise that poverty encourages migration from the country. Migration means a decrease in the workforce, creating more tension in the labour market over wage levels.

The last rise in the national minimum wage was on 1 January 2011. The minimum wage was LVL 200 (€280 as at 2 August 2013) per month in 2013, and the minimal hourly wage was LVL 1.20 (€1.69).

Government agrees to union requests

Adjustments in minimum wage rates are usually proposed by Latvia’s Ministry of Welfare after an analysis of various economic indicators and calculation of how the proposed change would affect the state budget. The current proposal presented three options – raising the minimum wage from LVL 200 (€280) per month to LVL 210 (€295), LVL 220 (€309) or LVL 225 (€316) per month.

At its meeting of 25 April 2013, the National Tripartite Cooperation Council (NTSP) agreed that in 2014 the minimum wage should be raised to LVL 225. The government’s decision was influenced by a World Bank report which drew attention to the high poverty level of Latvia’s inhabitants. According to data from the Central Statistical Bureau of Latvia (CSP), approximately 26.2% of economically active people in the country earn the minimum wage. Of these, 87% work in the private sector, and 13% work in the public sector.

Regulations adopted by the Cabinet of Ministers on 11 June 2013 state that as from 1 January 2014 the minimum wage will be LVL 225 (€316) – an increase of 12.5%

Social partners call for an integrated approach

Following the NTSP meeting, Līga Menģelsone, Director General of the Latvian Employers’ Confederation (LDDK), acknowledged that raising the minimum wage by 12.5% was a reasonable step. She added, however, that other related issues needed to be considered. The government, Ms Menģelsone suggested, may need to think about altering tax-free earnings thresholds, levels of personal income tax and other fiscal measures. She said the government needed to raise welfare payments and reduce the extent of the shadow economy.

Ms Menģelsone pointed out that according to CSP data, single-parent families and families with three or more children were at greatest risk of poverty. For that reason, LDDK had already stressed the need to increase tax relief for people with dependants.

LDDK has also previously insisted that the minimum wage should be viewed in the context of other employment and wage issues, and particularly whether an increase might persuade employers to reconsider the need for a low-paid worker and instead do away with the job.

Trade unions recommend raising tax thresholds and increasing support for dependants every year. They say this would raise the income of the low-paid and close the wage gap between them and the rest of the labour force more effectively than reducing personal income tax rates.

Commentary

There has been a number of discussions in Latvia about ways to improve certain categories of guaranteed income and one suggestion is that greater tax threshold differentials are needed. The current level would be retained at LVL 45 (€63) for higher salaries, but increased to LVL 84 (€118) for lower earners.

Benefits for those caring for dependents were set at LVL 98 (€137) as from 2014.

Increases are also planned for 2015. The minimum wage is to increase by a further LVL 7 (€10). Aid for dependents could increase to LVL 113 (€158). The non-taxable threshold in 2015 could increase to LVL 90 (€126).

The Ministry of Finance says that alongside these changes, it still plans to lower the current personal income tax of 24% to 22% in 2014 and to 20% in 2015.

Raita Karnite, EPC Ltd.

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