Ukraine's problems with possible minimum wage increase

Author : Oleksiy Kushch

Source : 112 Ukraine

President Poroshenko initiated an increase in the minimum wage from the current 118 USD to 151 USD
21:50, 7 December 2017

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President of Ukraine Petro Poroshenko initiated an increase in the minimum wage in 2018 from the current 3200 to 4100 hryvnia (118 USD to 151 USD), that is, immediately by 28%. This almost doubles the inflationary erosion of household incomes that occurred this year, because according to preliminary estimates, the consumer price index (consumer inflation) in percentage terms will be 14-15% per year. At the same time, we note that National Bank (NBU) declared target (inflation target) for 2017 at the rate of 8% (+ -2%). This news immediately excited not only the expert environment, but also ordinary Ukrainians.

Related: Groysman predicts decrease of inflation by 9% in 2018

In fact, raising the minimum wage is not good or bad. It is just wrong. First of all, from the point of view of managing labor resources in the country and improving the quality of human capital. And also taking into account the general requirements for improving the efficiency of the economy and labor productivity.

Unfortunately, the minimum wage indicator has completely lost its real economic content in Ukraine and has become a political tool convenient for the authorities. It is very convenient to break into the social code of the electorate with the help of this instrument.

From the point of view of the meanings generation, all this seems to be very confusing. According to the Constitution, Ukraine is a parliamentary-presidential republic, and the Cabinet realizes all the executive power in the country. So it is strange to hear from the Guarantor comments on such a standardized and dry indicator as the minimum wage.

Related: Economic forecast for Ukraine: Hryvnia weakening, high inflation and tarrifs

This news was actively articulated before the "planned" detention of Mikheil Saakashvili. The idea of the political technologists was quite simple and unpretentious. The man sitting in front of the TV and looking at the cobblestones in the hands of "non-proletariat" should have cried out: "Our wages have almost became 151 USD, but here we see another revolution."

Analysts of world regulators tried to create some kind of mathematical model that would link all the interrelations of GDP growth and labor productivity. So, for example, Patrick Schneider, in his article posted on the Bank of England, indicated that while it was possible to approach only the description of the problem, but not to its solution. In fact, there are two "puzzles": how to stimulate productivity by paying wages during GDP growth and how to get out of the crisis when GDP and labor productivity are declining at a faster pace. As the author says, world labor productivity in 2016 was more than 17% below pre-crisis level. At the same time, in 1990 to 2007, labor productivity grew by almost 35%. The main reason for the growth in labor productivity is capital investment, but, most importantly, investment in innovative technologies. That is why during the period of active economic growth labor productivity also increases, and in times of crisis it falls. Obviously, in terms of a crisis, the purchase of new technologies and investments in fixed assets suffer. As a result of this "saving", there is a reduction in production investment and a treading in place, and often a rollback occurs. Saving on innovation and investment leads to a reduction in the quality of personnel. Consequently, the crisis will be defeated when contrary to calls for savings, the real sector will successfully pass the "pain threshold" and begin investing in fixed assets and technologies. Invest in defiance of inflation expectations and pessimistic forecasts of economic growth. But is it appropriate in business for such altruism? Obviously, in times of crisis such overcoming of the "pain threshold" is possible only with the active participation of the state. That is why, the long-forgotten ideas of state protectionism are resurrected, and the ideas of market libertarianism are hidden "under the cloth."

Related: For the first time Ukraine is experiencing such a devastating crisis

The International Labor Organization (ILO) in its report "Wages in the World in 2014-2015" called the gap between wages and productivity, resulting in a reduction in the share of labor incomes in the overall structure of national income as a global trend. To overcome this problem, the world's largest countries - China, Germany, Japan, the United States actively use measures to stimulate wage growth. The same recommendations were given after G20 meeting.

In its report, the ILO focuses on the "composition effect," which is very relevant for Ukraine, but is hardly evaluated by either our statistics bodies or the government. The "composition effect" shows that fluctuations in the average wage indicator can be associated not only with a change in its value, but also with a change in the structure of the workforce. This phenomenon has the following consequences: in recent years hundreds of thousands of highly qualified specialists have migrated from the country. Thus, the key problem for Ukraine is the sharp deterioration in the staffing structure, when the domestic labor market has ceased to be competitive and attractive for highly skilled workers.

Related: Inflation, unemployment, and deep crisis of Ukrainian economy

As we see, the world actually "froze" in solving such a global problem as increasing the share of the population's participation in the redistribution of public goods. People who earn their living by their labor, ceased to participate in the sharing of the common "pie". The existing system froze their portion at the 2008 level and deprived of the right to vote. The key reason for the decline in the level of labor incomes in developing countries is participation in global technological chains in accordance with the global labor market. In accordance with the world's "ranking", developing countries are "assembled," mainly, in cheap commodity chains. As a result, they have a more or less stable share of low-paid workers, while the "middle" is actively migrating. Even Turkey, participating in world technological schemes, lost up to 5% of its "labor" income. Emerging markets suffer from the fact that the main surplus value is located in the "golden billion" countries.

In Ukraine, crisis majorly affected the so-called "middle class", which lost most of its labor income. Large "elite", earning on management rent, became only richer. If you take such an indicator as the ratio of the payroll of regular workers to GDP, in Ukraine this ratio has deteriorated by about 5% over the past four years: if in 2010-2013 it was 26%, then, starting in 2014, it decreased to 21%. The wage labor less and less began to participate in the redistribution of public goods, most of the added value went into the pockets of the oligarchs. This indicator can still be called the operating coefficient and in recent years it has significantly deteriorated.

Related: Doubletalks of social standards: Can Ukraine raise minimum wages by 3200 UAH?

In Ukraine, 47% of the payroll of full-time employees is formed in the industrial production sector, 15% - in transport, 16% in trade, and only 8% in agriculture, which nowadays is popularly called the driver of economic growth. Thus, an increase in the level of the minimum wage will lead to the leaching of working capital in the segment of industry, which will only strengthen the process of de-industrialization of the economy.

From the point of view of correlations on the economy, the decision to raise the minimum wages in Ukraine will not have classical consequences, as it happens in developed countries. As the theory shows, an increase in the minimum wage by 10% can lead to an increase in unemployment by 1%. Plus inflation, and then deflation, when an increase in unemployment will lead to a reduction in effective demand. In the case of Ukraine, there is a whole system of “mirror curves” that form significant “optical” distortions. Most of the increased minimum wages provides business. But the growth of this indicator only to a small extent leads to an increase in the real incomes of workers. The main consequences are manifested in the process of withdrawing from entrepreneurs their working capital in the form of additional tax payments (income tax and ERUs). The state is trying to change this "combination" in its favor. This is the right thing, but it should happen naturally, with the help of regulatory and fiscal incentives. Otherwise, such an expropriation in the style of "military capitalism" can only cut down on the weak economic growth. And in this situation, and the purses of the workers will not become fatter (except at the expense of small things), and the economy will not see the long-awaited growth of 3-5%. As for inflation, it will take place. In Ukraine, this concept is constant, like the weather change in autumn.

Related: Hugely increased wages - Ukraine's only way to reduce shadow economy

What Ukraine really needs is a transition to the regulation of the minimum hourly wage, which will protect the interests of millions of part-time workers and people working at a partial rate. In addition, it is extremely important to establish additional coefficients that, on the one hand, will increase the minimum level of wages for the most important working professions (after all, the minimum wages of a fifth-grade turner must differ from that of a security guard in a supermarket), and on the other hand, the required level of minimum wages for young professionals and people of pre-retirement age, as well as for newly created jobs (for 1-2 years from the start of the start-up). To do this, the minimum hourly wage rate must be multiplied by the corresponding adjustment sectoral, age and regional coefficients (according to the classifier of the main professions).

The above innovations will equalize the barriers to entry into the labor market for different age groups and encourage the creation of new industries, as well as create incentives to increase the number of highly skilled labor and block labor migration from the country.

Related: New economic distortion: Why wages grow in Ukraine?

In addition, it is necessary to establish geographical indices of labor remuneration and transfer the role of its defining to the local authorities: in Kyiv, the minimum wage level should objectively be significantly higher than in other less developed regions.

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