Minimum wage raise in Ukraine: Consequences for economy and living standards

Author : Bohdan Danylyshyn

Source : 112 Ukraine

The government announced an increase in the minimum wage – from September 2020 it would be 180 USD
13:45, 11 August 2020

Cabinet of Ministers of Ukraine announced an increase in the minimum wage – from September 2020 it would be 180 USD, from January 2021 – 220 USD, and from July 2021 – 235 USD.

I am convinced that this government decision is reasonable and meets the modern needs of the domestic economy and public finances. This step will help to resolve a number of structural imbalances in the economy and will stimulate the development of the domestic market. Here are a few arguments.

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  1. Alignment of wage disparities

In 2016 the ratio of the minimum and average wages in the economy was only 30%, then in 2017, after the increase in the minimum wage from 60 USD to 115 USD, it increased to 45%. In 2019, this ratio dropped to less than 40%, and the planned increase in the minimum wage in September would help restore it to 45%. For comparison, the ratio of the minimum and average wages at the level of 45-55% is kept in most countries of Eastern, Central and Southern Europe (Croatia, Poland, Romania, Czech Republic, Albania, Hungary, Slovakia) and the Baltic countries (Latvia, Lithuania, Estonia) ...

  1. Development of the domestic market

One of the fundamental factors in the development of the domestic economy is the expansion of the capacity of the domestic market. An increase in the income of Ukrainian citizens allows an increase in the consumption of goods and services (the share of consumer spending in the structure of total household expenditures stably exceeds 90%), which in turn will stimulate an increase in investment in the expansion of production by both domestic and foreign strategic investors. At one time, such a strategy was applied by China, which today is not only the largest market in the world but also the largest production site for goods that are consumed around the world.

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  1. Unshadowing of the economy

Almost a third of full-time workers in Ukraine in all types of economic activities receive wages close to the minimum value. At the same time, the aggregate expenses per month on average per household are 1.5-2 times higher. Since it is from the payroll that the personal income tax and the unified social contribution are paid, it is obvious that the payment of low official wages allows the employer to minimize the tax burden on the payroll.

In my opinion, a step towards increasing the minimum wage will help to remove part of the wage bill from the shadow and increase state budget revenues.

  1. Improving the living standards of Ukrainian citizens

In terms of purchasing power parity (PPP), that is, in terms of the volume of goods and services that can be purchased by a citizen of Ukraine, taking into account the price level, who receives an average wage, Ukraine is twice as low as other European countries. For example, in Poland, whose labor market is a magnet for workers from Ukraine, wages according to PPP are higher than the European average, which does not create pressure on prices but stimulates an increase in labor productivity and internal employment, which is partially covered by labor migration. Considering that in 2019 and in the 1st quarter of 2020, for the first time in the history of Ukraine's independence, the savings of the population acquired a negative value, the state policy aimed at increasing the level of citizens' incomes is not only justified but also necessary.

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At the same time, the government needs to take into account the risks from an increase in the minimum wage, given the possible impact of this decision on increasing inflationary pressures. To minimize them, the government, together with the National Bank, needs to introduce measures and special programs aimed at stimulating domestic economic activity and increasing the supply of goods and services, in particular within the framework of the "5-7-9" state program.

For their part, the Ministry of Finance and the State Tax Service of Ukraine should pay more attention to monitoring the payment of taxes charged to the payroll fund in order to prevent schemes to minimize them, in particular, through the formal transfer of employees to part-time employment.

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