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How Much the Minimum Wage Should Be and Why

The governing programme of the Ponta Cabinet stipulates a revision of the Labour Code, of the public sector unified salary law, and of the three-party agreement on the gross minimum wages for 2012-2016, as well as the amendment of the Social Dialogue Act.
According to the document, in view of boosting employment among under­privileged groups and the long-term unemployed, particularly young people, the following measures are consi­de­red: promoting a high-priority progra­m­me with social partners, aimed at preserving and increasing the number of jobs; amending the Social Dialogue Act, by establishing a three-party working group and streamlining the activity of the Economic and Social Council; revising the Labour Code and the public sector unified salary law; promoting an internship bill and amending the Apprenticeship Law and the Day Labourer Act.

Restoring salaries

In a first stage, public sector salaries will be increased by 8%, while the second stage in bringing salaries back to their previous levels is to be analysed in July, together with the IMF representatives who will return to Romania at that time for a new assessment. „Another salary increase will follow, which we will decide on after the international lenders’ mission in July. It is then that we will define a new salary raise stage“, Florin Georgescu said.
„8% is what we can give at this point. This 8% won’t go into consum­ption, but into economic growth,“ Georgescu explained. The minister mentioned that negotiations on the increase of public sector salaries took into account the deficit target, so as to safeguard the stability of the country.
According to Finance Ministry calculations, a 16% state sector salary increase in June would translate into a 2 billion RON budget impact, whereas a 5% cut in healthcare contributions, as considered by the previous government, would mean a 2.3 billion RON budgetary effort. As for the social security contributions from pension benefits, data indicate that returning the amounts charged erroneously this year alone requires 650 million RON. Romania’s rating already includes the political uncertainties related to the parliamentary election due this autumn.
Increasing public sector salaries and pensions by the aforesaid rates would mean a budget strain of 1 to 2 billion euro (because, one way or another, the rest of the money will return to public budgets). In my opinion, it is a feasible scenario.

About the minimum wage

The incumbent cabinet would like to increase the minimum wage from the current 700 RON to 850 RON, but for the time being the IMF has dismis­sed the plan. “When economists use the abstract notion of a free and perfect labour market, there is no need for a minimum salary. But in real life the labour market is neither free nor perfect. There are all sorts of cons­traints, which we may or may not be aware of. For instance, we may not be aware of the fact that only in 1833 did the British Parliament prohibit the employment of children under 9 years of age in factories. Twenty-first century people take this for granted. But in terms of the abstract, free and perfect market, this is a constraint. Romania is a market with monopoly features in certain sectors, i.e. in a particular geographical area or business line there is one, very powerful employer, which may do whatever it pleases unless it is subject to constraints. The logical decision, as far as these constraints go, is to increase the mini­mum wage. It makes sense in terms of budget revenues, of economic growth and, more importantly, in terms of hu­man capital,“ explains the new minis­ter delegate for the business environ­ment in the Ponta Cabinet, Lucian Isar.
Moreover, the government should at least double the minimum wage, which is very low. This may be accom­panied by a reduction of social security contributions, to keep salary costs from going up proportionately. At pre­sent, the minimum wage means net incomes of 530 RON and total costs for employers of 900 RON, with the state cashing 370 RON. For a gross salary of 1400 RON, current costs for employers reach 1800, of which 1014 RON goes to the employee and 786 RON to the state. If the government lowered the social security contributions to around 400 RON, it would not lose anything, but employees would earn double the current income. All in all, employers would spend an additional 500 RON, which would be amortised within months, thanks to the growing de­mand.

Minimum wages and competitiveness

An utterly stupid thing to believe is that a small salary means compe­titi­veness in terms of foreign investments. All rankings point to the opposite: countries with high wages attract the most foreign investments, and the hierarchy of foreign investments fairly matches the hierarchy of minimum wages.
Why? Quite simply, because a high salary means high purchasing power, small salaries primarily mean low purchasing power, restricting the market (regardless of the field). The most relevant example is Tnuva, which pulled out of Romania because people were too poor for its products.
Not all investors come for exports. If we think about it, the proportion of companies able to export is relatively small. A lot more businesses (and with the largest number of employees) target the local market, and they can­not develop or even survive by paying small wages. For instance, an electri­cian in a small town cannot survive because people have no money so they choose to settle things in the black market, with all the risks involved.
I believe any small retailer com­plai­ns about “people no longer having mo­ney.” Except for exporting companies, for which small wages are an advan­tage, all other businesses are affected by this problem. Particularly now, when Romania is a EU member and the labour market has been liberalised, the country loses skilled labour and companies have to pay quite a lot to qualified personnel – a skilled welder makes around 4000-5000 RON (although, of course, they make 2-3 times more abroad).
An average increase by 100 euro for 4,000,000 employees means an additional 400 million euro a month to boost local consumption. Most expor­ting companies will not be affected, because the average salaries they pay are above the minimum wages anyway, so they will not have to raise them by too much. For the convenience store on the street corner, the extra 1000 RON will be amortised quite soon, thanks to an increase in sales (this happens outside Bucharest, because in the capital city salaries below 1000 RON are only paid in the public sector).
Which brings us to the core of the matter. The government is the largest employer. The effort for state budgets would be rather big, around 1.2 billion euro a year. But a large part of this money would return to public budgets, one way or another, so the overall effort would be greatly reduced. If we add pensions to it, we would probably get a financial effort of 2 billion euro. But with the nearly 5 billion euro that would go into consumption, the state would recover more than half of this investment in one year.
Ex-prime minister Boc takes pride in the fact that “we haven’t got as low as Greece,” yet it is the Romanians who look for jobs in Greece, and not the other way round. If Romania is to be truly competitive, it should impose a minimum wage of at least 1600 RON (higher than in Poland), and social security contributions should stand at 40%, split between the employer and employee. Of this, 8% should go to healthcare, 2% to unemployment budgets, and 30% to pensions—and a 30% monthly contribution can ensure a pension equal to the salary for 14 years, if fully paid throughout the employment period. But I doubt anyone would dare take such a measure.

It was better “in the old times”

For a better and more accurate understanding, let’s contrast the figures with those before 1989:
1989 GDP = 97.6 billion USD, minimum wage 244 USD (2010 equivalent values)
2010 GDP = 161.6 billion USD, minimum wage 195 USD.
This means the 2010 minimum wage should have been at least 331 USD, i.e. 1020 RON, as compared to 600 RON, through the natural growth of the economy alone. But considering that that GDP was produced by over eight million employees, as against only five million today, the 1020 RON should be adjusted by a 1.65% productivity increase rate, so a fair minimum wage should be over 1600 RON, more precisely 1688.
Note: I agree, before 1989 the currency exchange rate was pure fiction; the “market” value was around 50 ROL/USD, instead of the official 15 ROL. This means the GDP was 29.2 billion USD, minimum wages 73 USD (of course, 2010 equivalent values). Therefore, in 2010 the minimum wage should be 5.53 times higher, i.e. 404 USD (1242 RON), or 2050 RON with the productivity adjustment.
This proves to what extent the poorest of the Romanians have grown poorer over the past 20 years, and how the economic growth has been distri­buted. True enough, we are talking a­bo­ut two different types of society, but the transition from dictatorship to freedom did not necessarily have to be done at the expense of the poor. As compared to the other countries in the Socialist camp, Romania has the dee­pest gaps, and they widen by the year. Instead of public policies aimed at addressing these gaps, the Băsescu regime has adopted some that deepen them, turning vulnerable categories into “enemies of the people”— drun­kards, loiterers, etc. (C.B.)

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