Minimum wage in Poland – should it be increased or subject to lower taxation

Lack of coordination of minimum wage and taxation hinders inclusive employment growth in Poland

Piotr Lewandowski

Polish government announced a minimum wage increase from the current level of PLN 1750 to PLN 1850 in 2016. Additionally, Prime Minister Ewa Kopacz promised at the Civic Platform party convention that there would be further increases of the statutory minimum wage during the four years’ term of office if her party got re-elected. If another party forms the government, increases of the minimum wage are very likely to continue. Minimum wage has again became a popular issue among politicians, in Poland and abroad. This year, for the first time in its history, Germany introduced a nationwide minimum wage (substituting the previous industry-level agreements on minimum wages). In the United States, President Obama advocated an increase of the federal minimum wage from USD 7.25 to USD 9 by the end of 2015, while British Chancellor of the Exchequer George Osborne announced replacing the minimum wage with (higher) national living wage expected to rise to £9 an hour by 2020.

In Poland, however, the series of minimum wage increases did not occur as a response to the crisis and stagnant wages – it began before the crisis. Between 2002 and 2007, minimum wage remained virtually on the same level. In the years 2007–15, it went up from PLN 1148 to PLN 1750, which represents an increase of over 50 per cent – even after taking inflation into account. In 2007, the minimum wage amounted to 35 per cent of the average wage (not a lot compared to other EU Member States), but it rose to 44 per cent of the average wage in 2014, placing Poland in the upper half of the EU, alongside the Netherlands, the UK and Slovakia.

The issue of minimum wage sparks controversy among both employers and employees. The former indicate minimum wage increases as an important reason for dismissals, while the latter perceive it as a guarantee of dignified work and protection against poverty. Both of these perceptions often prove exaggerated. According to results of an econometric analysis for the years 2002–13 published by the Institute for Structural Research (IBS), an average of 6 per cent of workers (aged 15 to 54) affected by minimum wage increases in Poland, lost their jobs every year due to the this policy. This translates into 116 000 persons on average per year. Is this a large or a negligible number in view of the 15–16 million working people in Poland? Opinions will differ, yet it is worth noticing that rising minimum wage did not prevented a total employment level to increase between 2007 and 2013.

Workers who were directly affected by changes in the minimum wage in Poland could expect a quicker increase in real wages and shorter average working time (first and foremost concerning overtime work). For this reason, we may talk about an improvement of working conditions among those who did not lose their jobs. However, it is probably of small consolation to those 116 000 persons who ended up unemployed. Moreover, increasing minimum wage will not solve the problem of poverty – according to the Polish Household Budget Survey data, in 2013 only 13 per cent of persons earning the minimum wage lived in (relatively) poor households. Most workers earning the minimum wage live in households with incomes close to average. The reason behind poverty in Poland is rather the fact that members of poor households do not have jobs at all or that only some of them work. Increasing the minimum wage will predominantly increase the income of those who do not live in poverty, which, of course, does not mean that they are affluent.

What is crucial to understand is that no policy operates in a vacuum and other regulations must always be taken into consideration. In case of the minimum wage in Poland, the most important regulations are high taxes imposed on low incomes and the possibility to circumvent minimum wage by employing workers on civil law contracts or through self-employment (to which regulations on minimum wage do not apply). In recent years, although the minimum wage in Poland has been going up, the tax rate on minimum wage earners has remained on the same high level. As a result, a major part of the “rise” given to such persons goes back to the state coffers. A full-time employee earning the minimum PLN 1750 gross currently receives ca. PLN 1350 net, while the total cost of his/her work for the employer exceeds PLN 2100. Figure below shows that the PLN 100 rise scheduled for 2016 will increase the total labour costs by PLN 121, while rising the net worker income by only PLN 70. The difference of PLN 51 will be absorbed by the tax wedge. According to the OECD, the relative difference between the net and gross minimum wage value in Poland is one of the highest among the member states of this organisation.

What is more, Poland is a country with highest share of temporary employment (28% in 2014) in Europe. We find that increasing the minimum wage has different consequences for persons employed on permanent employment contracts and for other groups of workers (on fixed-term contracts or civil law contracts). According to IBS’s estimates, among 116 000 persons who on average lost jobs each year as a result of the increasing minimum wage, 72 per cent (83 000) were workers with temporary term contracts, mostly women. Moreover, the minimum wage is not binding in Poland for the self-employed and people who work exclusively under civil law contracts. According to the Ministry of Finance data, the total number of self-employed (excluding agriculture) who do not hire any employees, and people with civil law contracts only, went up by a total of 600 000 persons between 2003 and 2013, and 400 000 of this increase occurred since 2007, i.e. the year when the process of increasing the minimum wage began. The minimum wage might not be causing unemployment but it’s likely to affect the structure of employment substantially, and not in the best possible way.

The solution is not to stop increasing the minimum wage in Poland, but to see it in a broader regulatory context of the Polish labour market. A government declaring to care about the income of low-wage earners should first and foremost ask itself whether – and how – it could leave more money in their pockets. Increasing tax deductible expense in personal income tax may bring identical benefits in terms of take-home pay as the announced increase of the minimum wage. Furthermore, it would increase take-home pay of not only those who now make less than the current minimum wage, but also those earning a little bit more. It would not lead companies to dismiss their employees or to force them to terminate an open-ended work contract in favour of task-specific contracts or self-employment. Lower income from the personal income tax could be compensated by imposing a slightly higher tax on persons earning few times the national average. The tax wedge on these workers in Poland is quite low compared to other European countries.

There are other possible solutions. But after eight years of regular minimum wage increases to a level approaching 50 percent of the average wage in Poland, it is high time to start treating minimum wage not as yet another electoral promise, but as one of several areas of government intervention which have to be consistent with each other in order to achieve goals they are expected to fulfil.