MINIMUM WAGE IN ESTONIA WHEN JOINING THE EUROPEAN UNION. Marit Hinnosaar Bank of Estonia

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1 MINIMUM WAGE IN ESTONIA WHEN JOINING THE EUROPEAN UNION Marit Hinnosaar Bank of Estonia Introduction In Estonia the minimum wage, which was set in the beginning of transition period at a similar proportion to average as in the EU countries, had for years stayed at the rather constant level. In the light of the rapid growth of average wage the minimum wage developments were lacking behind. While in the second half of the 90s minimum wage was increased in Estonia to reduce the incidence of low pay. In 2002 minimum wage formed still only 29 % of the average wage. But in 2001 by unions and employer representatives the general agreement of minimum wage increase was concluded. According to the agreement by the year 2008 minimum wage should form 41% of the average wage. Minimum wages are set in order to prevent the incidence of low pay and therefore reduce poverty among workers. While in doing so they might decrease employment. In practice it is argued that usually minimum wages are too low to have significant impact on employment among prime aged men, while wage floors might effect women and youth employment (Brown 1999). Many of the transition economies have followed the same trend in minimum wage policy, significantly increasing the minimum wage levels in the end of 90s and beginning of the current decade. In many transition economies the minimum wage developments have been following the European Union policies. While, the effect of minimum wages has not been much studied in the transition economies. Recently a study about minimum wages in Hungary has been published, as well as in the Czech Republic. In the latter the findings show that currently minimum wages are still too low, that their increase had substantial influence on employment (Gottvald et al 2002). While in Hungary the analysis sets the question whether the policy of minimum wage increase are to be considered as mistaken (Kertesi, Köllö 2002). In Estonia the effect of minimum wage increase has not been analysed before. In the current paper the impact of minimum wage increase on employment in Estonia is analysed. The empirical analysis of the impact of minimum wage increase is concentrated on the low-wage workers as the main risk-group whose employment the minimum wage could affect. The paper is structured as follows. The second part discusses the developments of minimum wages in the European Union and the history of the minimum wage policy in the European Union in order to explain some of the developments taken place in Estonia and look at the future trends. In the third part the minimum wage developments in Estonia are described. The forth part introduces the model and the 329

2 fifth the data used to estimate the impact of minimum wage increase. Then the estimation results are discussed and some policy implications presented. The final part concludes the paper. Minimum wages in the European Union Statutory minimum wages exist now in the 9 from 15 EU countries (France, Ireland, Belgium, Luxemburg, Holland, Great Britain, Portugal, Spain and Greece). In practice in some others the effective minimum wage exist due to the widespread collective bargaining, which results are extended to the non-organised workers. In 2002 the highest minimum wage when measured as a percentage to median earnings was in France (61%) and lowest in Spain (32 %). Table 1. Minimum wages in the European Union countries Country Belgium France Greece Luxemburg Holland Portugal Spain Source: Eurostat When looking at the past minimum wage trends during the past decades, then the overall conclusion can be that the share of minimum wages to median earnings has decreased in most of the EU countries (see table 1). Currently in some countries, for example Austria, Denmark, Greece, Portugal and Spain, the existence of minimum wages is not an issue of debate (Ioakimoglou, Soumeli 2002). While in others the argument generally opposes the view that wage floors reduce employment. In countries where the question might be more easily analysed because the wage floors were recently set Ireland and UK, their impact is unclear because the minimum wage was set in the period of economic growth. Table 2. Minimum wage policy: history of thought in the European Union Year and document The message 1989 European Community all employment should be fairly remunerated ; workers Social Charter shall be assured of an equitable wage ie a wage sufficient to enable them to have a decent standard of living 1993 European Commission the pursuit of an equitable wage must be seen as part of the general drive of achieving higher productivity and 2000 European Council - social exclusion strategy employment creation The best way to fight against social exclusion is a job. ensuring that the take-up of employment results in increased income 330

3 When discussing the role of minimum wage then the Social Charter is often referred to (see table 2 for the overview of the history of thought of minimum wage policy). In 1989 European Community Social Charter (Charter of Fundamental Social Rights of Workers) stated the following: all employment should be fairly remunerated. To this end, in accordance with arrangements applying in each country, workers shall be assured of an equitable wage ie. a wage sufficient to enable them to have a decent standard of living. In 1993 European Commission adopted an opinion on an equitable wage, in which it stated that the pursuit of an equitable wage must be seen as part of the general drive to achieve higher productivity and employment creation, and to foster good relations between the two sides of industry. From the end of 90s the focus in this area has shifted from the low and inequitable pay to the poverty reduction, social exclusion and promoting the quality of work (Ioakimoglou, Soumeli 2002). In 2000 the European Council in the Lisbon Summit launched a social exclusion strategy in response to the EU new objectives. The strategy stresses that the best way to fight against social exclusion is a job. The objectives of the strategy include a guarantee that everyone has the resources necessary to live in accordance with human dignity and ensuring that the take-up of employment results in increased income. Minimum wage in Estonia As mentioned minimum wage in the beginning of 90s was set at the similar level with the European Union countries measured as a percentage of average wage. Then the average wage growth exceeded the minimum wage increase and the importance of minimum wage decreased. The trend changed in the second half of 90s and now according to the agreement between unions and employers by the year 2008 minimum wage should form 41 % of the average wage Minimum wage (EEK) Figure 1. Minimum wage in Estonia Minimum wage as % of the average wage

4 Currently the minimum wage increase is in Estonia should lead to the decrease of the incidence of low pay. While its effect on the employment level has not been analysed. In the following part the impact of minimum wage increase on employment level is estimated. The model The following analysis consists of natural experiments occurring when the minimum wage level has been increased. The idea is to analyse the impact of the minimum wage increase on employment and the analysis is concentrated mainly on the low wage workers, the people whose wage was lower than the new minimum wage. This group of people form the treatment group. There is also a control group, which is defined as those individuals whose wage was in the interval between the new minimum wage and two times the new minimum wage. In the paper the probability that a person stays employed after the increase of minimum wage is modelled as a function of the size of the increase of minimum wage and the position in the wage distribution. The probability that a person will be employed in the period (t+1) conditional on the employment in period t is estimated in the form of logit-model: [ e 1e = 1] = Λ X + bb ( mw mw ) + cc ( mw mw ) ( ) Pr β (1) i, t+ 1 = i, t i, t ' i, t t+ 1 t i, t t+ 1 where Λ the standard logistic function, X vector of explanatory variables, β vector of parameters, B indicator variable representing a treatment group, C indicator variable representing a control group, mw minimum wage, b, c parameters, i, t indices indicating observation and time period. t Data description In the analysis the data is used from the Estonian Labour Force Surveys (LFS) covering the period of January 1997 to the June of The surveys used are LFS98 to LFS00. In these surveys the information about the persons wage is gathered before the minimum wage increase, which makes it possible to analyse the effect of the increase. To make the up-to-date conclusions about the minimum wage impact in the Estonian labour market the data would be needed about the more recent developments. This is a deficiency the current analysis could be improved in the future. Currently due to 332

5 the changes in the Labour Force Surveys methodology the recent surveys lack information about the persons previous wages, which does not allow to analyse the impact of minimum wage increase on employment conditional on the person location in the wage distribution. The datasets used able to analyse the minimum wage increases during the years 1998, 1999 and During the time period analysed in the paper minimum wage was increased in January of 1998, 1999 and The dataset has information about the persons wage before the increase of minimum wage and ables to follow the labour market conditions of the persons until the second quarter of the year of minimum wage increase. This means that change in person s labour market conditions can be analysed only one quarter of the year after the increase of minimum wage. The variables are excluded from the sample in case there is no information about the person s wage level and in case person is not working full-time. In the current study person is considered to leave the employment only in case he/she is losing a job due to the employer s initiative. In case the person leaves employment due to his/her own reasons it is not considered to be minimum wage impact and therefore the person is considered to continue to work. The control variables introduced in the equation to be estimated describe sector worked in (14 sectors), enterprise size (8 groups of enterprise sizes), profession (9 professions), region (5 regions), education (3 educational groups), age (3 age groups), sex. Also the reported monthly wage rate is controlled for. The estimation results and its policy implications Table 3 presents the estimation results. The table shows that minimum wage increase leads to employment decrease in case of people whose wage was below the new minimum wage as well as in case of workers with the wage slightly higher than the new minimum wage. While the negative employment effect is higher in case of the workers with the wage below the new minimum wage level. During the time period under consideration the minimum wage was less than 30% from the average wage. The significant impact of this low level minimum wage on employment, suggests that in future minimum wage increases might have much stronger negative impact. Without other significant changes in the economy minimum wage increase in the future years should lead to fall in employment. Setting a wage floor binding enough to keep significant proportion of workers away from labour market leads to the need to increase social security payments to the unemployed. To reduce the negative impact of the minimum wage increase other policy measures should be used. Minimum wage increase should be accompanied for example with the policy measures directed to the productivity increase of the workers. Currently in Estonia active labour market measures are poorly financed and their role is rather insignificant. 333

6 Table 3. Estimation results Coef. sd Target group ** Control group ** Log wage 0.470*** Sectors and enterprise size Other Health and social work Education Public administration and defence; compulsory social security Real estate, renting and business activities Financial intermediaton *** Transport, storage and communication Hotels and restaurants Wholesale, retail trade; repair of motor vehicles and other goods Construction *** Electricity, gas and water supply Mining and quarrying 3.270*** Agriculture, hunting and foresty, fishing 1.913*** size * size *** size ** size *** size *** size ** size * Education level and profession Basic education Higher education 0.452* Legislators, senior officials and managers Professionals Technicians and associate professionals Clerks Skilled agricultural and fishery workers Craft and related trade workers Plant and machine operators and assemblers Elementary occupations Regions and other Northern * North Eastern ** Central Southern Age Age Female 0.549*** No of observations Log-likelihood Notes: * Denotes 10 per cent significance level; ** denotes 5 per cent significance level; *** denotes 1 per cent significance level. 334

7 Conclusions The paper analysed the impact of minimum wage on employment in Estonia and found that minimum wage increases have had significant negative impact on employment in case of low-wage workers. During the time period the current study concentrated on ( ) minimum wage in Estonia was less than 30% of the average wage. Which suggest that the future increases in minimum wage might have much stronger negative impact on employment level. The results from the estimation suggest that minimum wage increases in Estonia need to be accompanied with policy measures, which reduce the negative impact of minimum wage. For example more attention should be paid on the active labour market measures to increase the productivity of the workers. References 1. Brown, C. (1999), Minimum Wages, Employment and the Distribution of Income. Handbook of Labor Economics, Vol 3B, pp Gertesi, G., Köllö, J. (2002), Labour Demand with Heterogeneous Labour Inputs after the Transition in Hungary, and the Potential Consequences of the Increase of Minimum Wage in 2001 and Budapest Working Papers on the Labour Market No. 5, 44 p. 3. Gottvald, J., Hančlová, J., Pytlikova, M., Stanek, V. (2002), Minimum wage in the wage structures of the Czech and Slovak Republics. Determinants of Individual Pay and Firm s Pay Structures in the Czech and Slovak Republic, Ed. By Jaromir Gottvald, Ostrava: Vysoká Škola Báňská Technická Univerzita Ostrava, Ekonomická Fakulta. 4. Ioakimoglou, E., Soumeli, E. (2002), Low-wage workers and the 'working poor'. European Industrial Relations Observatory. Kokkuvõte ALAMPALK EESTIS EUROOPA LIIDUGA LIITUMISEL Marit Hinnosaar Eesti Pank 90ndate alguses Eestis kehtestati alampalk, mille suhe keskmisesse palka oli sarnasel tasemel Lääne-Euroopa riikidega. Hiljem alampalga suhe keskmisesse palka langes. Trend muutus 90ndate teisel poolel, kui alampalk suurenes kiiremini kui keskmine palgatase. Vastavalt ametiühingute ja tööandjate kokkuleppele peaks alampalk 2008.a moodustama 41% keskmisest palgast. 335

8 Alampalga eesmärgiks on takistada inimesi töötamast ühiskonnas ebaõiglaseks peetava madala tasu eest ja seeläbi vähendada vaesust töötavate indiviidide hulgas. Seda tehes võib aga alampalk vähendada hõivet. Enamikus riikides on leitud, et alampalk on liiga madal, et avalda olulist mõju meeste hõivele, samas kui alampalk võib vähendada naiste ja noorte hõivet. Üleminekuriigid on järginud sarnast trendi alampalga muutmisel: 90ndate lõpus ja käesoleva kümnendi alguses on enamikus üleminekuriikides alampalka oluliselt suurendatud. Samas kui alampalga mõju ei ole üleminekuriikides kuigi põhjalikult uuritud. Eestis ei ole alampalga tõstmise mõju hõivele siiani käsitletud. Käesolevas töös hinnati alampalga tõstmise mõju hõivele Eestis, keskendudes eelkõige madalapalgaliste töötajate hõive analüüsimisele. Empiirilise analüüsi tulemusel leiti, et alampalga tõstmine on perioodil avaldanud olulist negatiivset mõju madalapalgaliste töötajate hõivele. Arvestades, et vaatlusalusel perioodil moodustas alampalk vaid 30 % keskmisest palgast, võib oletada, et edasine alampalga tõus avaldab hõivele veelgi suuremat negatiivset mõju. Empiirilise analüüsi tulemused viitavad vajadusele tasakaalustada alampalga negatiivset mõju teiste majanduspoliitiliste meetodite abil. Üheks võimaluseks alampalga tõstmisega kaasneva hõivetaset alandava mõju vähendamiseks on kasutada aktiivseid tööturumeetmeid tööjõu produktiivsuse suurendamiseks. Peale sissejuhatust, töö teises osas, kirjeldatakse alampalga rolli Euroopa Liidu riikides, selgitamaks Eestis aset leidnud alampalga suurenemist. Töö kolmandas osas antakse ülevaade alampalga trendidest Eestis. Neljandas osas esitatakse hinnatav mudel ning viiendas kirjeldatakse analüüsis kasutatud andmeid. Töö kuuendas osas tuuakse hindamistulemused ja nende tõlgendus ja viimases osas esitatakse kokkuvõte. 336