Hungary: Working poor, minimum wage and minimum income

In Hungary, roughly one million working people – a quarter of the employed population – were paid below the official minimum subsistence level in 2013. Hungarian trade union confederations, the Democratic League of Independent Trade Unions (LIGA) and the Hungarian Trade Unions Confederation (MASZSZ), have proposed making the net minimum wage equal to the minimum subsistence level. 

Background

According to a report by the European Commission on employment and social developments in Europe 2013, in-work poverty (the rate of those in work and at risk of poverty) has been on the rise all over Europe since the financial and economic crisis. People in this category, as defined by a 2010 Eurostat report on in-work poverty in the EU (13.4 MB PDF), have a job but their income is below 60% of the national median income.

When discussing in-work poverty, Hungarian experts and trade unions usually use a narrower definition, saying that the working poor are those whose net wage income is less than the subsistence minimum. Based on this definition and using statistics from the Central Statistical Office (165 KB PDF),  roughly one million people – a quarter of the employed population – had a job in 2013, yet were unable to make a living as their wages did not reach the official subsistence minimum of HUF 87,510 (€288) a month for an individual, or HUF 253,779 (€835) a month for a family of four. This means, at best, that their maximum gross wage was approximately HUF 134,500 per month (€442), before family tax allowance.

Prior to the economic crisis in 2008, only 18% of the working population earned below the then monthly personal subsistence level of HUF 71,736 (€288). Figures thus clearly indicate an increase in the number of working poor.

The subsistence minimum in the EU is less widely used as a poverty threshold, but considered more as an income that allows a worker to pay for basic needs and continuous living costs in a particular country. However, given the polarisation of wages and shrinking social allowances in Hungary, the comparison of net wages to subsistence minimum seems to be reasonable, especially when the subsistence minimum itself is widely considered as rather low.

Experts, along with trade unions, argue that in-work poverty in Hungary is primarily linked to low pay, especially to the low minimum wage. As explained in the European Commission report mentioned above, the widely accepted other main causes, such as too few jobs, and household composition, have a limited effect.

Reason for low minimum wage

There is a strong case that the net value of the minimum wage is far too low. At the onset of the economic crisis in October 2008, the net minimum wage was HUF 56,190 (€187) a month. By 2014, this rate had increased by 18% to HUF 66,485 (€216). More importantly, this happened in such a way that the gross value of the minimum wage actually rose by 47% between 2008 and 2014 (from HUF 69,000 to HUF 101,500). The increasing gap between net and gross values is because the tax credit system, which stopped the lowest paid from having to pay income tax, was frozen at the 2007 thresholds and then abolished when the flat income tax of 16% was introduced in 2010. So although employing the lowest paid workers has become much more expensive for employers, workers have not received proportionally more due to their increasing share of taxes and contributions.

The gap between the net minimum wage and subsistence minimum has widened continuously. While the net minimum wage in 2008 was equal to 78.3% of subsistence minimum, the same ratio was 73.4% in 2013. Thus, the work of the lowest paid workers has been downgraded in economic terms.

According to a study by Hungarian analysts (in Hungarian) using the Eurostat approach, the value of the Hungarian net minimum wage, compared with the risk-of-poverty threshold has not changed over the past six years, while there has been a dynamic positive shift in this in neighbouring countries

Trade union proposals

Both major Hungarian trade union confederations, the Democratic League of Independent Trade Unions (LIGA) and the Hungarian Trade Unions Confederation (MSZOSZ) have independently proposed that the net minimum wage should be equal to the subsistence minimum in the medium term.

LIGA has initiated a three-year catch-up programme to be agreed within the framework of the annual tripartite wage negotiations. According to this proposal, between 2015 and 2017 the lowest wages should rise every year in such way that, by the end of the period, the minimum wage will equal the subsistence minimum. Annual wage guidelines to help social partners in their collective bargaining and wage setting should be agreed so that they ensure that wages in general can slowly, but steadily, approach the European level.

MSZOSZ has produced a comprehensive proposal, Programme against in-work poverty (in Hungarian), which is essentially the same as LIGA’s proposal: that, by 2018, the minimum wage should equal the subsistence minimum. To achieve this goal, MSZOSZ calculates that the net minimum wage would have to rise by 10% every year. MSZOSZ’s proposal also highlights that one of the reasons for the increasing in-work poverty is that the wages of workers employed in public works schemes are legally set at 76% of the minimum wage. MSZOSZ argues that there should be no minimum wage difference based on the form of employment, and that it should be the same in the private and public sectors. Statistical data show that the worst deterioration in wages has taken place in the public sector: in 2008, 4% of public employees and civil servants earned less than the subsistence minimum but, by 2013, 16% of public workers were in this predicament, mostly because of wage freezes.

Response from the government and employers

Tripartite negotiations on the minimum wage for 2015 and annual wage guidelines began recently, with neither the government nor employer organisations seemingly very keen on the idea of a multi-year agreement.

The general secretary of the Confederation of Hungarian Employers and Industrialists (MGYOSZ) has argued that high median wages and high minimum wages occur only in successful and strong economies. Thus, good economic results and growing output should be achieved before talks take place about decent wages. Nevertheless, he acknowledged in a recent conference speech that decent wages are important for both workers and employers, since they shape purchasing power and, consequently, economic output.

However, a representative survey by the Hungarian analysts group, Policy Agenda (in Hungarian), found that 54% of managers of small and medium enterprises (SMEs) would welcome a multi-year wage agreement since it would make the economic environment more predictable. Only 33% of the managers said that they would not endorse such a commitment because economic conditions keep changing, and thus it is not possible to plan for a longer time span; 14% of the respondents had no definite view on this issue.

The government has promised to consider the MSZOSZ proposal on the multi-year wage agreement, but has also stated that, in general, it prefers annual negotiations and agreements. The government has also announced that wages, including the minimum wage, cannot be raised faster than economic output and that loans (from the International Monetary Fund or EU) should not be used to finance wage adjustments – the practice of  previous governments.

Commentary

Trade unions are increasingly vocal about in-work poverty. The pressure of their members, and the negative impacts of undeclared work, have convinced them that there is a need for a radical change in the minimum wage level.

Employers' organisations clearly reject the proposed idea of parity with the subsistence minimum, while the government has reacted cautiously. The question is whether trade unions can gain enough support from their members to stand up more strongly for the working poor and whether they can initiate a referendum on in-work poverty measures. Such a step would put the debate, currently within the framework of annual wage negotiations, into the public and political arena. The real issue is why should a quarter of workers, working full time, continue to fall below the official subsistence level, while the government talks up the improved state of the economy.

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment