FOR Communication: Minimum wage: The government harms the economy by not helping the poorest
The government decided to raise the gross minimum wage from the current 1850 to 2000 zł, starting on the January 2017 year. This is a much larger increase than that to 1862 zł, required by law. We estimate that in 2017 this will be approx. 47% of the average wage. This publicity stunt will not help the low earners but hurt the poorer regions of Poland and will have negative consequences when the economic situation deteriorates.
While currently, during a boom, when companies are looking for workers, the impact of the increase of minimum wage on employment can be small, an economic downturn will create either the temptation of or the need for a transition to the gray zone or search for exemptions. The government sets a uniform minimum wage for the whole country, therefore the change will be most harmful in regions with lower wages (Figure 1).
Significant increases in the minimum wage have already had a negative impact on employment in Poland in the past. Even if its impact was not visible at the macro level, because the boom led to an increase in total employment, the negative impact of the minimum wage increase was seen in the case of the weakest participants labor market. According to a recent estimate of the Central Statistical Office, in 2014, the minimum wage was received by 13% of the employees. They will be primarily affected by the change. Research by Kaminska and Lewandowski (2015), focusing just on those whose earning are close to the minimum wage, shows that the increase in the minimum wage increases their risk of job loss. And so in the years 2002-2013, annually an average of 116 thousand people lost work as a result of increases in the minimum wage. 39% of them are young people under 30 years of age.
Part of the negative effects of raising the minimum wage is not visible immediately. Some foreign studies show in recent years, that impact of the minimum wage on employment immediately after the rise is limited. In the long term, this impact can be much greater. According to the research of Aaronson et al. (2016), the negative impact of minimum wage increases in the long term may be up to 5 times higher than in the first year of the contract. In the long term, companies have time to adjust to new conditions, and in the face of high labor costs, they replace the least skilled workers with machinery. Cited work showed this effect on the example of the catering industry in the United States. In the longer term, higher minimum wages led to the liquidation of some independent bars and restaurants, replaced by a much more automated and requiring fewer employees chain restaurants of McDonald's type.
Constructive help for the poorest should encourage them to enter the legal labor market. Therefore, the government should conduct a review of the system of social benefits and coordinate it with the tax system, so that extra work will always be profitable. Today, unfortunately, all too often the extra money earned in the labor market, not only is taxed sharply but also it could mean that one of the various thresholds is crossed , resulting in loss of benefits. In other words, the Polish system of social support creates a trap in which taking up a job is punished by a decrease in income (loss benefits are higher than the additional revenue from work after deduction of all taxes).
The government is running away from system activities, focusing on more resonant in media, but ineffective, and even downright harmful projects, ignoring that that:
(1) Part of benefits has strong disincentives effects. The "500+ Family", in conjunction with an extended maternity leave, generates strong incentives for women to leave the labor market. Child benefits have led to a decline in labor supply among women for example in Spain (Gonzalez, 2011). (2) Benefits are often poorly designed. The allowance for the second child of the "500+ Family", and a large part of the benefits in general, depends on the fixed income thresholds. This can lead to situations where an increase in job income lowers total family income. Therefore, some people refrain from work or prefer to receive part of their remuneration "under the table" in order not to lose the right to unemployment benefits (Trzeciakowski and Zajkowska, 2015). In Poland especially housewives pay attention to this aspect, in the context of undeclared work (Łaszek, 2015).
Full communication by FOR (in Polish) available to download here.
You are welcome to contact our expert:
Rafał Trzeciakowski, Economist an FOR
[email protected]
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