Nerijus Mačiulis. Can wages grow too fast? | Business

The government has already made a decision to increase the minimum monthly salary by another 12.4 percent, up to 1,038 euros, from next year. Since 2015, MMA has more than tripled both pre-tax and post-tax, almost the most in the EU.

The consensus to index the minimum wage also contributed to its extremely rapid growth – to determine the MMA every year taking into account changes in the average wage and to aim for the ratio of the minimum wage to the average wage to approach 50 percent. When comparing salaries before taxes, the ratio currently stands at about 42 percent and after taxes at about 52 percent.

Indexation has worked so far – absolute poverty has decreased, the purchasing power of the population has increased, and exporters have not lost export markets (so far). But it also programs at least one ticking problem.

Although less than 2.5 percent earn the minimum wage in Lithuania. full-time workers, its change affects a much larger part of the population. A rise in the MMA forces companies to preserve wage differentials, so a similar rate of wage growth trickles down even to those who earn well above the minimum wage. A hard-to-stop carousel of minimum and average wage increases, breaking away from market laws, twisting each other.

Partly because of this, over the past decade, the average salary after taxes in Lithuania has risen from 570 to almost 1,353 euros. This jump was influenced not only by increased productivity and prices, but also by a change in the structure of GDP. In the middle of the last decade, workers had 40 percent less. of GDP created in the country, and this year this share already exceeds 50%. It is interesting that according to the ratio of salaries and GDP, we have already surpassed not only the EU average, but also, for example, Sweden, the Netherlands or Belgium.

Here one could celebrate such rates of wage growth, but at the same time one should not ignore the unwanted side effects that this transformation may bring. During the same period, productivity – the value added created by one worker – grew much more modestly, at just 17 percent. Even worse, for the past three years, the GDP per working person in Lithuania has even been decreasing, mainly due to the influx of immigrants creating less added value into the labor market.

It is probably not difficult even for a non-economist to imagine what happens when the labor costs of companies grow faster than the added value and income created for a long time. This can only result in rising prices, shrinking profit margins and/or loss of competitive advantage and export markets. It can be expected that the textile companies going bankrupt this year are more the exception than the first swallows. But you know what they say about that hope.

We can predict possible future scenarios by evaluating the experience of other countries similar to ours. Average labor costs in Estonia are about a fifth higher than in Lithuania, but let’s not be in a hurry to be jealous. According to the latest assessment by the International Monetary Fund (IMF), one of the main reasons why Estonian industry is in deep recession is the loss of cost competitiveness – wages have fallen behind productivity.

At the moment, the volume of manufacturing production in Estonia has fallen to the level of 2019, and in Lithuania it is one third higher than it was at the beginning of this decade. Almost 50 percent of company bankruptcies in Estonia this year. more than in 2022.

There are at least a few ways to preserve indexation of the minimum wage without hurting the lowest earners – without overstepping the mark and without creating an increase in the unemployment rate.

Since there are significantly fewer minimum wage earners in the public sector than in the private sector, setting a minimum wage could only resist trends in the private sector. This year, wage growth in the private sector has slowed faster than in the public sector, which does not compete in export markets, and wages there are more determined by political cycles than market laws.

Another possible instrument is the introduction of indexing brakes or a fuse. Such a safeguard could look like this: if the unemployment rate rises more than 2 percentage points above the lowest level of the past 2 years, the minimum wage should grow at twice the rate of the average wage. Let’s call it the 2/2/2 rule. Other safeguards could include differentiation of the minimum wage by region or age group.

According to the data of the State Data Service, currently the unemployment rate of the population aged 15-74 in Lithuania reaches 8 percent (after removing seasonality), two years ago it did not reach 6 percent. In the first half of this year, there were 118 thousand in Lithuania. unemployed, 30 thousand more than two years ago. Unfortunately, the rapid increase in the minimum wage probably won’t comfort them.

Lithuania is no longer and will not be a country of cheap labor. Wage growth doesn’t have to stop and won’t stop, but avoiding a wave of excess bankruptcies and rising unemployment will require greater business investment in automation, efficiency gains, and employee competencies. At that time, politicians and authorities could recognize that the low-hanging fruits have not only been picked but also eaten, and for the sake of sustainable long-term progress, it will not be enough to increase one tax or MMA with an easy hand.