Latvia: Wage flexibility and collective bargaining

  • Observatory: EurWORK
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  • Published on: 27 April 2009



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Country:
Latvia
Author:
Kriss Karnitis
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In 2004-2007, average net monthly wages and salaries have almost doubled. Real wages have grown by 9.7% in 2005, by 15.6% in 2006 and by more that 20% in 2007. Wages are an important issue in collective bargaining. However, the fastest growth of wages and salaries is to be found in sectors, where collective bargaining is weak (construction) or does not exist (banking, real estate). It is expected that wage growth will slow down in coming years. The importance of flexible wage systems increases. Variable pay is applied at individual, team and organisations’ levels. VPS change towards more focus on results and individualisation.

Section 1. Variable pay: forms, basic data and trends

1) What are the main types of variable payments systems (VPS) used in:

a) manufacturing companies

Manufacturing is among the problematic sectors of Latvia’s economy. The share of manufacturing in GDP has decreased to 11.5%. Average wage levels in manufacturing are at only 90% of the average national net wage (97% of average net wage in private sector).

In manufacturing companies, variable payments systems (VPS) operate at all levels – individual, team and organisations, but most typical are organisational schemes and schemes applied to management. Variable pay is usually paid in form of supplements, because this legal payment is more flexible to changes. “Downwards” changes in supplements are not prohibited by law, while making any deductions from basic wages requires written consent from the employee.

The main type of variable pay is the so called “13th wage” which is paid at the end of year. The amount of the “13th wage” may be set equally for all workers (full monthly wage or part of it) or differentiated according to traditional principles of wage differentiation (examples of differentiation can be found in the following companies: JSC Kimmels Riga, Baltika Latvia Ltd. (clothing producer), Elpa (milk processing)).

Application of variable parts of wages on a regular basis (monthly, quarterly) depends on the wage policy of the company. There are differences between large/economically strong companies and small/economically weak companies.

Large and economically strong companies apply all forms of VPS in order to motivate workers to work better.

Piecework is used as a form of variable pay for workers. Employers admit that piecework may be a biased wage system, since appraisal of the tariff for piecework may be (used to be) disputed.

Sales and productivity based bonuses are most typical VPS in manufacturing companies related to management and leading specialists.

Appraisal set pay is applied in some large manufacturing companies. The major difficulty in such systems is formation of fair appraisal principles.

Profit related bonuses are used mainly in VPS related to management. Employees’ financial participation is a rare phenomenon, as it is not supported by Latvian legislation. However, some savings oriented systems are used. In some companies workers are supplied with health/life insurance policies, contributions to their pension funds, or payments to savings funds. For instance, Baltica Latvia Ltd. has established a savings’ fund on behalf of employees. The employer contributes to the fund the amount of one monthly salary per year. Employees may receive benefits from the fund after five years waiting period.

VPS may be based also on other principles, e.g. depending on years worked within the company or good performance of obligations. VPS may be applied to specific scarce professions, for instance, engineers.

A popular form of VPS are in kind benefits. Instead of money bonuses, in kind bonuses such as gift cards (tokens), collective trips or collective culture events may be offered.

In small and economically weak manufacturing companies, VPS is used as a part of a regular wage. The typical payment system in such companies is that basic wages are set at the level of minimum wage and it is increased when the government increases the level of the national minimum wage. All other payment is variable pay, and this may change depending on the economic situation of undertakings. Overall, the wage level in small companies is below the average in manufacturing companies. In manufacturing 6,258 companies or 98% of all companies are SME’s.

b) retail banks

Banks have stronger incentives to apply VPS with motivation purposes. Contrary to manufacturing, banks have constantly improving economic situation and a high demand for high-skilled workforce. Due to these two circumstances, basic pay is stable and rather high, and banks may afford to be more innovative and generous in introducing variable payment systems.

The average net wage in banks is about two times the average net national wage. According to a survey in November 2006, banks are recognised as better employers and they have advanced positions in the labour market. Still, competition between banks is high – currently there are 21 commercial banks and 2 subsidiaries of foreign commercial banks in Latvia – and pay is an important factor in the competition for labour.

VPS operate in banks at all levels – individual, team and organisations, but most typical are organisational schemes. All of questioned forms of VPS, as well as specific forms listed in the previous section, may be found in Latvian banks.

Piecework is applied in banks in a specific way for bank operators. For this category of workers regular wage consists of basic component and variable pay depending on amount of performed operations.

Sales- and productivity based bonuses and profit related bonus systems are typical VPS in banks. They may be applied to the team or to management. Appraisal set pay is also used in some banks.

Employees’ financial participation is not introduced in Latvian banks. Instead, banks use a variety of bonuses in form of contributions to employees’ savings funds, insurance and pension systems, including company based systems.

2) For each type of VPS, please provide information on their quantitative significance as a proportion of earnings.

A survey of Marketing Research Study Factum (619 respondents) reveals that about half of the respondents have had remarkable extra income in 2007.

In large manufacturing companies, where collective bargaining is active, as well as in large banks variable pay is used as additional pay, and amounts to 10-20% of the annual income. Normally, the basic part of the wage is higher in more skilled jobs and professions.

In small manufacturing companies, where basic wages are set at the level of national minimum wage, and all other payments are handled as a variable pay, the variable component may increase the basic component by several times.

Information on quantitative significance of each type of VPS is not available.

3) What have been the main trends in VPS in recent years?

In conditions, when demand exceeds supply on the labour market, payment systems, especially VPS have become an important factor in competition for labour. For this reason, variable pay will be strongly promoted by employers.

An important trend in recent years is that employers reassess wage levels and available supplements more often than before (every quarter now instead of once a year before).

Of the existing forms, productivity-profit-result and savings oriented VPS will become more prominent and widespread. Individualisation of variable payments is another important trend. Employers have recognised that general schemes, like “13th wage” payments for all are accepted by employees very soon as a normal pay and it ceases to increase motivation to effective work. Some employers have implemented innovations in the “13th wage” schemes – e.g. differentiation of pay regarding results of individual work.

There are incentives to develop legislation in order to promote implementation of employees’ financial participation.

With the stabilising of the economic situation, malformed forms of variable pay (VP as a part of regular wage for all workers) should become less widespread.

Section 2. Wage flexibility and collective bargaining

Please state, for each sector,

i) whether it is governed by single or multi-employer collective bargaining arrangements;

Manufacturing includes 14 subsectors. The sector is represented by several trade unions and employers’ organisations. A single employers’ organisation and a single trade union representing the entire manufacturing sector do not exist. Subsector level trade unions are: Book Industry Trade Union (Grāmatrūpniecības arodu savienība, GAS), Industrial Workers Trade Union (Industriālo nozaru arodbiedrība, INA), Trade Union of Agriculture and Food Industry Workers (Lauksaimniecības un pārtikas nozaru arodu biedrība, LPNAS), Trade Union Latvijas Metals (AA Latvijas Metāls), Metallurgic Workers Trade Union of Liepaja (Liepājas Metalurgu arodbiedrība), Metal Workers Trade Union (Metālistu arodbiedrība) (Table 1). Typical employers’ organisations (in compliance with the law on employers’ organisations and their associations) do not exist in manufacturing. However, some of the existing organisations represent employers, and some companies are members of the national level employers’ organisation – Latvian Employers’ Confederation (Latvijas Darba Devēju konfederācija, LDDK).

Intensity, results and dominating levels of the collective bargaining in subsectors vary. All manufacturing companies may be divided into two groups – large former state companies or foreign owned companies, where collective bargaining is in place, and new established national companies, where collective bargaining is less active or does not exist. As Table 2 indicates, only two subsectors – the food industry and a part of the metal industry have reached general agreements.

In this way, collective bargaining in manufacturing may result equally with single- and multi-employer arrangements depending on the subsector.

In the banking sector there are only single-employer collective bargaining arrangements. Sector level trade unions do not exist in the banking sector and sector level collective bargaining does not take place. There is the trade union of Employees of State Institutions, Self Governments and Financial Institutions, but this trade union covers only workers of the Central Bank – Bank of Latvia. The only existing trade association in the sector – the Latvian Association of Commercial Banks (Latvijas Komercbanku asociācija, LKA) is not an employers’ organisation in compliance with Latvian legislation, however it is member of the national level employers’ organisation. Besides, there is no demand for sector level collective bargaining in the banking sector because working conditions are advanced compared to other sectors of the economy.

ii) the coverage (percentage of companies and employees) of collective bargaining;

Available statistical data is represented in Table 1and Table 2.

Table 1. Activity of trade unions in manufacturing
  Trade union members Females Workers in companies with trade union Trade union organisations in companies
In 2006 People People People Number
Book Industry Trade Union 320 n.a. 1100 9
Industrial Workers Trade Union 6528 4130 12172 72
Trade Union of Agriculture and Food Industry Workers 3599 2137 7247 40
Trade Union Latvijas Metals 771 322 1287 6
Metallurgic Workers Trade Union of Liepaja 1831 565 2583 1
Metal Workers Trade Union 797 431 2037 8
Total 13846 7585 26426 136
Coverage, %     52  
Total in manufacturing (2006)        
Number of companies       6354
Number of employed, thsd.people        
Table 2. Agreements in manufacturing
  Collective agreements Other agreements Coverage by collective agreements General agreements Social guaranty funds
In 2006 Number Number People Number Number
Book Industry Trade Union 0 1 n.a. 0 0
Industrial Workers Trade Union 40 2 10621 0 3
Trade Union of Agriculture and Food Industry Workers 28 2 5619 1 1
Trade Union Latvijas Metals 6   1287 0 0
Metallurgic Workers Trade Union of Liepaja 1   2583 0 1
Metal Workers Trade Union 7 1 1986 1 0
Total     22096    
Coverage, %     84    
Total in manufacturing (2006)          
Number of companies          
Number of employed, thsd.people     159.9    

iii) the percentage of the workforce that is female

See Table 1

2a. Wage flexibility under multi-employer bargaining arrangements

1) In the sector(s), are there any recent instances of

a) sector agreement(s) which have provided for a wage freeze or wage increases below inflation?

To our knowledge, there are no cases where sector agreements provided for a wage freeze. However, sector agreements may provide for wage increases below inflation due to unexpectedly high inflation (Inflation has been more than 10% since August 2007).

b) ‘unauthorised downwards’ wage flexibility, whereby companies have effected wage freezes or wage increases below inflation which are not authorised by a sector agreement?

Cases of ‘unauthorised downwards’ wage flexibility, where companies have introduced wage freezes or wage increases below inflation which are not authorised by a sector agreement are not typical in sectors with general agreements.

2) Is there scope for derogations from the wage norms established by the sector agreement(s) through mechanisms such as hardship, opt-out or discount clauses?

Wage norms established by sector agreement are usually observed and positively overachieved because of specific current conditions (lack of workforce, labour demand exceeds labour supply, emigration, high inflation, low starting wage levels). Besides, wage norms are usually rather “soft” in sector agreements so that they are feasible for all companies for which the agreement is binding.

3) Is there scope for supplementary negotiations over wages at company level (two-tier negotiations) within the sector agreement(s)?

Two-tier negotiation is a typical negotiation practice in Latvia, but this takes place only in unionised companies (usually large companies, former state owned companies or foreign owned large companies). A general principle of wage negotiations is as follows: the government sets the national minimum wage, sector level general agreement describes wage policy in general terms, and company level collective agreement describes wage agreements in detail. These agreements must observe general sector wage policy, yet they are strongly tied to company wage policy. Company level collective agreements may or may not include provisions for implementation of VPS systems. Such provisions are included on request of employees, but such a request is not a common practice.

Almost all wage supplements are agreed at the company level, and it is about 10-20% of the total wage income.

4) Are VPS regulated by provisions in the sector agreement(s)?

VPS may be specifically regulated by provisions in sector agreements, but this is not a case in the sectors under consideration.

5) Is there provision in the sector agreement(s) for individual employees to make choices trading an element of wages against e.g. working time (hours/ holidays) or deferred income (pension contributions)?

Provisions for individual employees to make choices trading an element of wages against e.g. working time (hours/ holidays) or deferred income (pension contributions) are not typical in sector agreements.

6) Are there instances of any of the above forms of wage flexibility becoming the focus of industrial disputes?

To our knowledge, instances when wage flexibility in manufacturing or banking sectors as set by multi-employers agreements has become the focus of industrial disputes are not known.

7) Is there any evidence or debate about a gender dimension to wage flexibility, in terms of its effects?

Gender discrimination is strongly prohibited by Latvian legislation. Wage systems and principles should provide gender equality. However, gender differences in wages exist in both sectors under consideration.

Gender dimension to wage flexibility in terms of its effects is not debated. Gender dimension is never concerned in sector agreements.

2b. Wage flexibility under single-employer bargaining

1) Are there any recent instances in either/both sectors of wage freezes or wage increases below inflation concluded under company wage agreements, with unions and/or works councils?

Collective agreements on wage freezes have not been negotiated under current economic and labour market conditions. Agreements on wage increases below inflation are possible due to unexpected high inflation rates.

2) In the relevant sector(s), are organisations without collective bargaining

a) any more likely to implement wage freezes or below-inflation increases to base pay?

Organisations without collective bargaining could be more likely to implement wage freezes or below-inflation increases due to economic difficulties. However these companies should also take into account labour market trends, and they risk to loose workers if their wage policy is not attractive for workers or jobseekers. The situation used to be solved by illegal payments (avoiding taxes). This applies more to small manufacturing companies.

b) more or less likely to use VPS than organisations covered by collective bargaining?

There is no basis (no empirical research) to use the label “more” or “less” or “equal” regarding the attitude of companies towards VPS.

As described above, organisations not covered by collective bargaining are more likely to use VPS as a part of the normal salary. On other hand, such organisations may also use VPS in order to increase work efficiency through better motivation to productive work. Such companies implement their wage policies, including clauses regarding variable pay, supplementary pay and bonuses, through individual work contracts.

3) Are VPS in the relevant sector(s) regulated by provisions in company agreements with unions and/or works councils?

VPS may be regulated by collective agreement, but this is not a common practice. Employers usually try to avoid including firm financial obligations in the collective agreements. In their opinion, VPS become less effective if ‘downward flexibility’ is eliminated by collective agreement.

The wage norms set by the collective agreement, such as levels of basic and variable pay, types of variable pay and the level at which these issues are covered by the collective agreement, strongly depend on the company’s wage policy.

Unfortunately, company level collective agreements are not available for analysis to the extent that would allow to generalize what types of variable pay are covered by company agreements, what forms do such regulations take, which norms are included and what has been changed in the types of schemes covered by company agreements.

4) Are there any examples of company-level agreements concerning provision for individual employees to make choices trading an element of wages against either working time (hours/ holidays) or deferred income (pension contributions)?

Theoretically company-level agreements may include provisions for individual employees to make choices trading an element of wages against either working time (hours/ holidays) or deferred income (pension contributions). Trading an element of wages against deferred income (pension contributions) is rather typical practice in wage policy of Latvian companies.

Usually these provisions are negotiated on an individual basis and fixed in the labour contract.

5) Are there instances of any of the above forms of wage flexibility becoming the focus of industrial disputes in the applicable sector(s)?

In compliance with available information, the forms or application of wage flexibility has not been the focus of industrial disputes in sectors under consideration.

6) Is there any evidence or debate about a gender dimension to wage flexibility, in terms of its effects?

See question 7 (2a).

Gender dimension regarding wages is not a typical item of collective agreement.

Section 3. Views of social partners and government

3a Employers’ organisations

1) Under multi-employer bargaining arrangements, Is enhancing scope for ‘downwards’ flexibility in basic wage levels (e.g. via hardship clauses etc.) a prominent objective for employers’ organisations?

Causeless “downwards” flexibility in basic wages is prohibited by the labour law.

In compliance with the law, an employer may deduct from the work remuneration payable to the employee the compensation for losses resulting to the employer due to poor quality performance of employee obligations or other circumstances, but the making of such deduction requires written consent from the employee.

2) Under multi-employer bargaining arrangements, is enhancing scope for ‘upwards’ wage flexibility through greater scope for supplementary negotiation at company level a prominent objective for employers’ organisations?

The two existing general agreements are not a sufficient empirical basis for conclusions that enhancing scope for ‘upwards’ wage flexibility through greater scope for supplementary negotiation at company level is a prominent objective for employers’ organisations.

3) Is the promotion of wage flexibility through VPS a prominent objective for employers’ organisations?

Yes, the promotion of wage flexibility through VPS is a prominent objective for employers’ organisations.

4) At organisational level, in each of the two sectors, what are the key rationales leading companies to implement each type of VPS, as applicable?

The key rationale leading companies to implement certain VPS is better motivation of employers to effective work with the company. VP policy and favouring of certain VPS depends on the specific technological conditions of the company. What is good for one company may be a failure for another.

5) Have employers’ organisations considered or addressed any potential gender dimension to wage flexibility, whether in terms of rationale or effects?

The gender dimension regarding equal pay is not in the scope of priorities of employers’ organisations.

3b Trade unions

1) What is the position of trade unions towards proposals aimed at enhancing the scope for downwards wage flexibility?

Trade unions focus on general wage levels more than on specific issues regarding wage systems. Wage flexibility is not among the priorities of national trade union organisation, and these issues are not topical for sector level trade unions. Yet trade unions are very sensitive towards any downward trend in wages.

2) Where applicable, how have trade unions sought to regulate use of any increased scope in sector agreements for downwards wage flexibility?

There have not been proposals for downwards wage flexibility in sector agreements.

3) Under multi-employer bargaining arrangements, is enhancing scope for ‘upwards’ wage flexibility through greater scope for supplementary negotiation at company / organisational level a prominent objective for trade unions?

Enhancing scope for ‘upwards’ wage flexibility through greater scope for supplementary negotiation at company / organisational level is not a problem at the sector level negotiations. Collective agreements are always focused on the setting forth the lowest levels, and it is not prohibited to overreach these levels in company level agreements.

4) What is the position of trade unions towards each type of VPS? What objectives have they pursued in negotiations and consultation over the introduction and operation of different types of VPS?

Trade unions support VPS that provide higher income. However the role of trade unions in introduction and operation of different types of VPS is very limited, because this issue is negotiated mainly at the company level, and trade unions are not established in all companies.

5) Have trade unions considered or addressed any potential gender dimension to wage flexibility, whether in terms of rationale or effects?

Gender inequality in pay and their position towards wage flexibility are not among the priorities of trade unions.

3c Role of Government

1) Have there been any recent government policy initiatives to promote ‘downwards’ or ‘upwards’ wage flexibility, or variable payments systems?

The government supports wage flexibility.

2) Are there any legal provisions which regulate any of the different types of VPS?

Division three of the Labour code regulates work remuneration. In compliance with the law (Section 17), work remuneration is the regular pay for work payable to an employee, and which includes a salary and supplements specified by regulatory enactments, the collective agreement or the an employment contract, as well as bonuses and other kinds of payments related to work.

In compliance with the Labour code (Section 62) “An employer shall organise in the undertaking a time salary system or a piecework salary system, and a system of supplements and bonuses in conformity with regulatory enactments and the collective agreement.

An employer has a duty to inform employees in writing regarding the introduction in the undertaking of a new work remuneration system, as well as regarding amendments to the existing work remuneration system, at least one month in advance.”

Section 70 sets forth that work remuneration shall be calculated and paid in cash. An employer has the right to pay work remuneration as non-cash payments only where the employee and the employer have specifically so agreed.

The law does not regulate different types of VPS. Special requirements, e.g. to have certain types of schemes, codetermination rules on implementation of, and changes to, schemes, are not established.

3) Are there any fiscal incentives aimed at promoting the take up of different types of VPS?

Fiscal incentives aimed at promoting the take up of different types of VPS are not established. There is special tax regime for payments on behalf on employees in insurance systems, pension funds and investment funds. Discussion has started on implementation of similar tax incentives for employees’ financial participation systems.

4) Have there been any significant developments in wage flexibility, as broadly defined in the introduction, in the public sector in recent years?

In compliance with the Labour law (Section 62), work remuneration for employees of institutions financed from the State budget and the accounting system thereof shall be determined by the Cabinet of Ministers. The basic methodology for the assessment of intellectual work, as well as the assessment of physical work and the specification of occupational qualification categories shall be determined by the Cabinet of Ministers. The positions of employees working in the public sector shall be classified in conformity with the basic duties to be performed in groups of positions and levels. The Cabinet shall determine the position classification system and the procedures for the classifying of positions.

In addition to regular wages public sector workers in some institutions or sectors receive bonuses, premiums and supplements, depending on the budget situation of the particular institution.

5) Has the government considered or addressed in any way the potential for forms of wage flexibility to have differential impacts according to gender?

The government has provided norms for equal pay. Article 60 of the Labour law sets forth that an employer has a duty to specify equal work remuneration for men and women for the same kind of work or work of equal value. Any specific norms regarding the potential for forms of wage flexibility to have differential impacts according to gender are not established.

Commentary by the NC

In 2004 – 2007, the upward trend in wages was driven rather by the market situation than by collective bargaining. Labour demand increases due to fast economic development, while labour supply declines due to negative population growth and emigration. Disproportion between labour demand and supply was more evident in growth sectors (trade, construction, banking and real estate) and for workers in simple professions. As a result, wages and salaries in simple professions are high compared to other professions. The majority of companies in these sectors are not covered by trade unions.

Wage pressure in other sectors also increases. Having in mind low wage levels in Latvia compared to other EU countries, as well as open borders to more generous labour markets, drastic Latvian immigration regulation and high inflation, the only possible solution might be to increase workers wages. At end of 2006, Latvia had the 5th lowest net wage level in EU and the lowest gross wage level of the Baltic Countries.

On other hand, economic potential of the fast developing economic sectors has reached its maximum and development of such sectors slows down. With this, the wage growth in these sectors should also slow down, and disproportions in work remuneration between simple and complicate professions should reduce. There are signs that workers’ positions with regard to payment issues get weaker, still we expect that remarkable wage pressure will remain until the wage level in Latvia in all professions reaches the level that is comparable to wage levels in other EU countries.

The before mentioned survey of Marketing Research Study Factum reveals that only 24% of respondents had a surplus in balance between their income and regular expenditure. These are respondents from higher income groups and respondents over 45 years of age. Another 76% of respondents report that they have had deficit in their income/expenditure balance. The deficit is covered by bank loans or by borrowing resources from family members or friends.

With increasing wages, labour costs will increase, having an impact on companies’ competitiveness and economic situation. This encourages employers to apply more flexible wage systems, in order to increase effectiveness of labour force and to secure against risks of firm financial obligation towards employees in case of temporary economic hardship.

A bigger diversity of flexible wage systems is characteristic for service sectors and enterprises without trade unions, while manufacturing and large service companies with trade unions (usually former state owned companies) maintain more traditional wage systems. Like other sectors, manufacturing experiences labour shortages, yet it does not have resources to implement attractive wage schemes.

Kriss Karnitis, Institute of Economics, Latvian Academy of Sciences

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