Government debates raising the minimum wage

Trade unions, employers and legislators are hashing out a likely increase in the minimum wage for next year, with unions asking for up to 15 percent higher salaries starting in January.

The pay hike, the first since 2007, was discussed at a tripartite meeting of politicians, employers and labor unions Aug. 16 and is meant to go into effect in January 2012. Discussions will be framed by the country's slower economic recovery, which could put companies in a vulnerable position if asked to cough up higher wages. From the employee's perspective, increasing household costs are set to rise even higher with the imminent hike in the value-added tax (VAT) that could pose a very real challenge to lower income families.

The debate is connected in part to another ongoing discussion about increasing the state subsistence level, or the set calculated cost of basic living in the country, between 6 percent and 12 percent at the beginning of 2012. Officials from the ČMKOS labor union confederation have said their calculations show living costs have gone up 14.6 percent in the past four years, and will continue to rise because of a VAT increase set for next year on previously discounted items like food - all while energy prices continue to climb. To make up for that, they say a 15 percent minimum wage hike is only reasonable.

Employers, however, say the subsistence level and, in turn, minimum wage should only be increased 6 percent. Company and employer representatives, as well as some economists, argue that a minimum wage increase as steep as 15 percent would be a kick to companies that are still down from the economic crisis, because while growth continues, it has taken some hits that have left domestic and international consumer confidence weak.

"The trouble is not so much about increasing the minimum wage, as only 1 percent of the working population receive minimum wage. What's important is that it creates pressure to push all wages up, which is something I doubt companies can afford without increasing productivity," said Pavla Břečková, a board member of the Association of Small and Medium-Sized Enterprises and Crafts, which is working with the Confederation of Industry on the matter.

In addition, she added, general costs for companies would increase because of higher social security and health payments.

Economists say the effect of raising the minimum wage on consumer spending would likely be minimal, though they differ on how much employers would feel the costs.

"There are two opposite effects, and the combination ... won't be as positive as some believe. It may lead to cuts in some companies, and that's a problem at this time," said Tomáš Vlk of Patria Finance. "I don't think the increase is necessary economically. If it is very low, it is sometimes harder for people earning minimum wage, but [low minimum wage] increases the flexibility of the labor market, which leads to lower unemployment."

But the minimum wage increase would simply be in line with the natural nominal wage increase of between 10 percent and 15 percent in the past four years that companies are already adjusted to, said Daniel Munich, a member of government-appointed National Economic Council who teaches labor economics at CERGE-EI.

"Macroeconomically, it's like nothing," he said. "The problem is, there hasn't been a big change in a long time, so it is abrupt."

There's an international twist, as well. Compared with the rest of Europe, wages in the Czech Republic are significantly lower than those of its Western neighbors but in line with or higher than those countries to the East. For several decades, lower wages have been important for the country to attract foreign investment. A transition in the economy away from industry has gone hand in hand with nominal wage increases, which are partially due to higher education levels but also have contributed to stagnation in new foreign investment.

"Of course, we have to compete with Eastern countries; it's about these large manufacturers, like cars, but we've already started discussions about whether this is the kind of business we want to do forever," Munich said. "We need to have more advanced industries."

Cat Contiguglia can be reached at
ccontiguglia@praguepost.com