Government plans to double minimum wage

In late May 2003, the Latvian government announced that it plans to double the national minimum wage over a period of seven years. The current monthly minimum of EUR 106 for full-time employees will be increased by 14.3% in 2004, to stand at EUR 121, and should rise to EUR 210 (50% of the average gross wage) by 2010. The plans have met with a mixed reaction from the social partners and experts.

According to Latvian labour law, the minimum wage paid may not be lower than the minimum set by the government. The national minimum wage is not linked to any economically-based income indicator, with the cabinet determining the minimum wage for 'normal-time' employees and the minimum hourly rate on the basis of fiscal and social considerations. From a very low level - EUR 3.48 in 1992 (1 LVL currently equals 0.661 EUR) - the monthly minimum wage has increased to EUR 105.9 in 2003. The government: raised the minimum wage twice in 1992 (to EUR 5.07 and EUR 11.35); doubled it in 1993 (to EUR 22.70); raised it twice in 1994 (to EUR 34.04 and EUR 42.36); increased it in 1996 (to EUR 57.49), 1998 (to EUR 63.54), 1999 (to EUR 75.64) and 2001 (to EUR 90.77); and set it at EUR 105.9 from 1 January 2003.

At the end of May 2003, the government announced its minimum wage 'concept' for the coming years. The concept envisages that by 2010 the minimum wage will be increased to equal 50% of the average gross wage, bringing the rate to EUR 210.29 a month. In 2004, it will be increased by 14.3% to EUR 121.03. In subsequent years, the rate of growth will be slower, at an annual average of 9.2%-10.2%. The planned minimum wage increases are not, however, fully guaranteed, as the government reserves the right to decide on the increase every year, depending on the economic situation in the country.

Trade unions have evaluated the government's plans positively. However, some experts are of the opinion that the planned growth in the minimum wage will have an adverse effect on state and municipal budgets and will decrease employment. Business representatives have expressed anxiety that the envisaged increase will reduce the competitiveness of Latvian companies and contribute to growth in public service tariffs. The government maintains that its planned minimum wage increases will bring more advantages than disadvantages. All interested parties accept that it is a good idea to have a long-term policy for such social and employment issues.

The socio-economic significance of the minimum wage has changed over time. At the beginning of the 1990s, the minimum wage was a benchmark for determining a number of social benefits and pay schemes. In a context of increasing economic difficulties, the government decided to make social benefits independent of the minimum wage, thus reducing the latter's importance. However, it still sets a protective framework for the income of employees (though only partially, because the minimum wage is currently only 76% of the official 'living wage'), and serves as a basis for determining non-taxable income. Furthermore, the teachers’ pay scheme is linked to the minimum wage and the pay levels of public sector employees are measured against it. The minimum wage is extensively used as the basis for determining the amount of administrative penalties.

The rather limited scope of the minimum wage notwithstanding, its amount is a constant theme of social dialogue, with attempts to coordinate the different interests of trade unions, employers’ associations, municipalities and the government.

Trade unions demand increases in the minimum wage to protect the interests of employees, although employers argue that the pay level in the business sector depends on the economic situation of the particular employer and low wages are currently a decisive factor in the competitiveness of Latvian companies. A groundlessly high minimum wage, it is argued, will force companies to decrease the number of employees or their time in employment (ie move them to part-time work). In reality, employers tend to use the minimum wage as a threshold for tax evasion – they pay personal income tax and social contributions (which amount to 49.9% of pay) on the basis of the minimum wage, and pay the employee the rest of their wage in cash. In this respect the increase in the minimum wage might increase tax revenue. However, taking into account that the minimum wage is the actual remuneration level in healthcare, educational and cultural institutions under public and municipal administration, there are some doubts whether it will be possible to implement the new minimum wage requirements in tight budgetary circumstances.

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