Minimum wage in Poland needs change, not a revolution

On January 20, 2016, Polish government presented a draft of a new bill on minimum wage. It’s main elements are:

• Introduction of an hourly minimum wage of 12 zl (gross) for workers on contracts of mandate and self-employed on service contracts, that would exist in parallel to a monthly minimum wage for employees (1850 zl gross in 2016). The hourly minimum wage would enter into force from 1^st of July 2016. Firms are to be required to keep track of hours worked by people on contracts of mandate and self-employed.
• Allowing labour inspectors to verify if companies keep track of the hours in question and if they pay the resulting minimum amount to workers on contracts of mandate and self-employed. Fines are about to range from 1 000 to 30 000 zl.
• Abolishing (from January 1, 2017) the special rule for labour market entrants which currently states that during the first 12 months of life-time employment, 80% of the national minimum wage can be paid.

Introduction of the hourly minimum wage in Poland itself is a good concept. It is currently in work in countries like Germany, United Kingdom or United States. It would mitigate the non-compliance with the minimum wage through overtime work hours – the forthcoming IBS working paper by Karolina Goraus and Piotr Lewandowski shows that in the CEE region, Poland has the largest share of workers earning monthly minimum wage and at the same time working so many overtime hours that in terms of hourly wages they actually earn less than the equivalent of the minimum wage.

In Poland, civil-law and service contracts are the only legal way of avoiding the minimum wage. Tackling this issue is necessary, but the Ministry of Family, Labour and Social Policy proposition has several flaws. The major one is that an hourly wage of 12 zl gross would be higher than the hourly equivalent of the monthly minimum wage (1850 zl gross). Workers with contracts for which the minimum wage was so far not binding, would suddenly have to be paid more than workers on employment contracts with minimum wage. This would probably reduce the number of contracts of mandate and service contracts with the self-employed, but they would not disappear completely as they would remain more convenient for some companies – these contracts are easier to terminate and require no funding of sick days and leaves.

Entrepreneurs also criticise the idea of introducing these changes in July 2016. The problem lies in the simultaneous introduction of several crucial changes at once – the statute also imposes a mandatory record of the time of work of workers on contracts of mandate and self-employed which will create extra administrative burden. Each change should be introduced gradually. The government expects workers affected by the new statute to switch to employment contracts. However, it’s unlikely. The recent changes in the labour code, social security contributions and now the minimum wage, although needed, did not make it easier or cheaper to hire on employment contracts. Some workers will get employment contracts, but some will be moved to the informal employment or dismissed, while others will be required to work longer and receive more duties.

The government’s proposition can raise the level of unemployment. Minimum wage is necessary, but its rapid change may carry negative effects. IBS working paper by Agnieszka Kamińska and Piotr Lewandowski shows that in 2002-2013 Poland, approx. 100 thousand workers per year lost their jobs due to minimum wage hikes, but in the period of 2007-2009, when after several years of only adjusting the minimum wage for inflation it was suddenly raised from 1148 to 1466 PLN, the number of job separations was twice as high. For contrast, when the minimum wage was first introduced in the UK in 1998, it started at a low level and was raised carefully and gradually, leading to an increase in incomes of the least earning workers without a simultaneous increase in unemployment. In Germany, where the minimum wage was successfully introduced in 2015, a two-year transition period was maintained.

Therefore, it would be better to introduce the minimum wage for workers on civil-law contracts and self-employed gradually, for instance with 80% of the target 12 zl, and after 6-12 months increase it to 90% and then again to 12 zl, while monitoring the response of the labour market. It would be much safer, especially considering that the government acknowledged in the regulatory impact assessment that it has no clue what is the number of workers on contracts of mandate or self-employed earning below the hourly 12 zl gross.

Abolishing the rule of the 80% minimum wage during the first year of work of labour market entrants is another bad idea. I disagree with the government’s reasoning that the reduced minimum wage was introduced during a labour market slowdown and as such it is no longer needed. Lower minimum wages for youth or labour market entrants are a common feature of minimum wage systems around the world. Numerous studies show that the impact of minimum wage on overall employment is usually small, but that it is mostly the youngest workers who suffer job losses. If the 80% rule is scrapped, there is a considerable risk that people with lower education will have difficulties in finding their first job, especially in less developed regions of Poland.

The main flaw of the current regulation is that only work on employment contract is considered for the life-time tenure. Thus, if a graduate works for e.g. two years with a contract of mandate, and after that gets an employment contract, the 80% rule applies during the first year of employment contract, even though a worker is in practice not an entrant. However, it would be enough to modify the bill and include the spells of work on civil-law contracts in the calculation of life-time tenure, so the 80% rule applies only to proper labour market entrants.

Finally, the proposition does not address the inconsistency between the minimum wage and the tax-benefit policy in Poland. The tax wedge imposed on minimum wage is the highest in OECD. Raising the minimum wage from 1750 to 1850 PLN from January 1, 2016, translated into 70 zl higher net wage of a worker, and extra 50 zl of income tax and social security contributions. The total labour costs for firms thus rose by 120 zl. If the government really cares about wages of the least-earning workers, it should tax them less, for instance through raising the tax deductible expenses in the Personal Income Tax. That would be helpful to improve incomes and living standards of all low-paid workers without increasing risk of adverse employment effects.