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EU Minimum Wage Policy – Would Hungary Benefit or Lose if Implemented?

Márton Jász 2021.05.16.

The debate concerning the EU minimum wage level has been going on for more than a decade, and its progress has been very limited so far. Major EU member states have been reluctant to follow that path, let alone have an EU-wide policy on the subject. Most recently, Ursula von der Leyen, the president of the European Commission, pledged to implement an EU minimum wage policy, and in October 2020 the Commission put a proposal on the table regarding the increase of the minimum wage across member states. Even though Hungary accepted the EU’s guidelines on the minimum wage, they still maintained that the issue should be regulated by the member states themselves. However, the question of whether Hungary would actually benefit or lose if it was to implement such a policy is still open for debate, as economists on both sides have arguments in favor and against a unitary minimum wage. Analysis. 

During the 2016 State of the Union, Jean-Claude Juncker, the President of the European Commission, talked about increased efforts towards the construction of the European Pillar of Social Rights, an initiative that sets out 20 key principles which aim to increase opportunities within the EU and make it a more fair and inclusive organization. From 2017 onwards, within the framework of these 20 principles, President Juncker specified his plan to implement a minimum wage policy, stressing that even though member states are free to set the minimum wage themselves, there is a certain level of dignity that should be respected. The plan aims to ensure adequate wages for workers, in order to profit from a decent standard of living, as well as allowing low-skilled and young workers to secure employment.

When Ursula von der Leyen, the new president of the European Commission took office in 2019, she pledged to put the minimum wage policy proposal on the agenda once again, and on October 28, 2020, the commission put forward a proposal for an EU Directive on adequate minimum wages after two rounds of consultations with the social partners in February and June. The aim is that by 2024 all workers in the EU should earn a fair and adequate wage, no matter where they live.

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Where does Hungary stand in terms of minimum wage compared to other EU states?

Within the EU, minimum wage levels vary considerably among member states, ranging from 332 Euros per month in Bulgaria to 2,202 Euros per month in Luxembourg. Minimum wages are generally presented as monthly wage rates for gross earnings, that is, before the deduction of income tax and social security contributions paid by the employee; these deductions vary from country to country. Minimum wage is generally defined as the lowest wage that employers are legally obliged to pay their full-time employees.

Based on the level of national gross monthly minimum wages within the countries of the EU (expressed in Euro), on January 1, 2021, countries can be classified into three main groups:

  • Group 1: national minimum wage below EUR 700 per month. This group includes: with a national minimum wage below EUR 700 per month. This group includes: Bulgaria, Hungary, Romania, Latvia, Croatia, Czechia, Estonia, Poland, Slovakia, and Lithuania.
  • Group 2: national minimum wage between EUR 700 but lower than EUR 1,500 per month. This group includes: Greece, Portugal, Malta, Slovenia, and Spain.
  • Group 3: national minimum wage above EUR 1,500 per month. This group includes: France, Germany, Belgium, the Netherlands, Ireland, and Luxembourg.

Minimum wages in 21 EU countries as of January 2021. Source: Eurostat

There are also large differences between member states in terms of minimum wage policy arrangements, in both practical and institutional terms. As of January 1, 2021, 21 out of the 27 EU member states have a national minimum wage, while EU countries without a national minimum wage are: Denmark, Italy, Cyprus, Austria, Finland, and Sweden. In countries where there is no national minimum wage, usually they are against the government setting such a number, and therefore these countries are the most skeptical about implementing a uniform EU strategy on this matter. In these countries, workers and employers have to agree on wages and the government does not intervene in salary negotiations. Trade unions– organizations that represent workers– bargain salaries with employers and take care of ensuring that workers are paid a reasonable wage. Thanks to this process, despite the absence of a minimal wage, the wages in these countries are not low at all, especially when compared to the EU countries with the lowest minimum wages.

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In 2021, within the EU member states, Hungary had the lowest national minimum wage after Bulgaria, with a total of only 442 Euros per month as the absolute minimum employers are legally obliged to pay their employees. Hungary maintains a national minimum wage system throughout the whole country. However, from 2011 onwards the minimum wage has increased from 280 Euros.

What exactly does the European Commission’s proposal suggest?

For this reason, as Nicolas Schmit, European Commissioner for Jobs and Social Rights argued, although employment is at its peak in the European Union, many workers find it difficult to make a living from their pay, and many are also affected by in-work poverty. According to Schmit, under the European Pillar of Social Rights, all European workers have the right to a decent living wage, and the European minimum wage is intended to promote this right. However, interpreting the new policy as having the same uniform minimum wage across the EU is misleading, as this plan would be impossible to implement. Nicolas Schmit also reacted to this proposition by contending:

This is not the case. It would destroy the economy if Bulgaria would adopt the Luxembourg wage. Tomorrow there would be no Bulgarian economy.”

He emphasized that the minimum wage policy is not aiming to adopt same minimum wages for all Europeans, as this would be unrealistic. Instead, what the EC proposes is better convergence, the reduction of gaps, improvement of wages, and the creation of a positive dynamic around minimum wages and wages in general. The commission highlighted that inequalities are on the rise and in-work poverty increased from 8.3% in 2007 to 9.4% in 2018 in the EU, and things could get worse as a result of the COVID-19 pandemic.

The goal of the Commission’s proposal is to ensure transparency in setting wages and asking member states to use indicators to measure the adequacy of minimum wages. Measuring minimum wage in proportion to gross median wage could be a good strategy for instance, as this indicator shows the exact middle value of all earnings throughout the country. The commission therefore argues that 60% of the gross median wage and 50% of the gross average wage can help guide the assessment of minimum wage adequacy in relation to the gross level of wages. But the EU executive is not imposing these indicators as targets.

Based on the last available data from the four-yearly Structure of Earnings Survey, in 2018 minimum wages represented over 60% of the median gross monthly earnings in only four member states: France (66%), Portugal (64%), Slovenia (62%), and Romania (61%). By contrast, minimum wages were less than half of the median earnings in six Member States: Croatia, Czech Rep., and Latvia (all 49%), Spain (44%), Malta (43%), and Estonia (42%). Hungary adopted a minimum wage that was 58% of its gross median wage.

Minimum wages as a proportion of median monthly earnings. Source: Eurostat

In addition, the Commission wants to ensure that collective bargaining covers at least 70% of workers to ensure proper minimum wages. Commission officials admitted that the legal base for the proposal is “complex,” given that there are limitations for EU action in this field as EU treaties exclude the possibility of setting a minimum wage and protect the autonomy of social partners. Still, the commission opted for a directive, with common compulsory principles for all member states, given “the strong political commitment” of president Ursula von der Leyen to fair wages.

What are the pros of implementing an EU minimum wage policy?

A joint European minimum wage policy would entail several important advantages. One of the most straightforward arguments in favor of such an initiative would definitely include provisions for a decent living standard even for low-income workers, and as a result, these people would get a chance to get out of poverty and have adequate food, housing, and any fundamental necessities in order to live.

Furthermore, an increased minimum wage would put more money in the pockets of workers, and the additional income would generate an increase in the aggregate demand as well as in employment. The more money people can make, the more they can spend, and in turn contribute to the economy. People would be able to afford more goods and services, businesses would profit from additional spending, and even jobs could be generated by economic growth.

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Also, if workers were able to maintain a better life due to the increase of the minimum wage, it is likely that they would be more productive, happier at work, and less likely to quit. They can more easily increase an organization’s productivity, potentially getting work done at a faster pace as well. Several studies also showed that higher minimum wages lead to lower labor turnover rates, which would benefit both the employee and the employer, as high employee turnover rates can disrupt the work of the company, hurt morale, and increase hiring costs.

Finally, in terms of the political institutionalism of European societies, there are several observations within social sciences that extreme forms of inequality can be dangerous to democracies. Adopting a policy that aims to reduce such inequalities by increasing the wage of workers can contribute to the healthy functioning of democratic institutions as well.

What are some of the counterarguments against minimum wage?

While some people believe that raising the minimum wage would improve the economy and reduce income inequality, others are skeptical about these results. Among those countries that address this skepticism is Hungary, which contends that although raising the minimum wage sounds good on paper, it would cause a lot of problems in practice across the economy.

Following the most recent EU Summit in Porto, Portugal, where the question of the minimum wage policy was discussed among numerous other crucial matters concerning the European Union, Hungary and Austria declared that setting such a policy would be “ill-advised” due to large differences in the level of development between European Union Member States.

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László Palkovics, the Minister of Innovation and Technology in Hungary, said that together with Austrian Labor Minister, Martin Kocher, both countries “…accept the [EU’s] basic principles [on taxation] and will take the methods into consideration, but will not accept this area being taken away from member states.”

Palkovics said Hungary sees the protection of workers as its top priority. Regulation of the minimum wage should be left to the member states, as they are best equipped to address the issue “in a sensible manner,” he said. He further argued that the Hungarian minimum wage had grown by 128 percent between 2010 and 2021, a result that “couldn’t have been achieved by any other means.”

Palkovics also noted that Hungary was opposed to a unified European tax system. According to the Hungarian stance, control over raising certain types of tax such as corporate tax should remain with member states to accommodate “diverse levels of development and economic structures,” he said. However, should the EU decide to unify the system, “number of adjustment tools are available,” Palkovics said.

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It is not surprising that the Orbán government opposes increasing corporate tax as well as the minimum wage. They primarily hold the viewpoint that taxation and the imposition of a minimum wage should be member state authority. The government sees Hungary’s international success and competitiveness fundamentally in downward tax competition, as they attract multinational companies to invest in the country. The government generously supports multi-companies with money and tax benefits, and since 2017 Hungary has the lowest corporate tax rate of nine percent in the EU.

Moreover, these firms also find Hungary a very attractive place to invest because it can provide cheap labor costs. As Gábor Gion, the State Secretary for Financial Policy Affairs, argued during a press conference organized by the Friends of Hungary Foundation, Hungary Today’s publisher, factors that make Hungary attractive include the fact that wage-adjusted labor productivity is the highest in the EU here. From another viewpoint: in proportion to productivity, wages are the lowest in Hungary. Gion also emphasized that since companies were forced to downsize (from expensive places), they moved jobs over to cheaper regions where a sufficient workforce was available, making Central and Eastern Europe a particularly attractive region.

The government also believes that when minimum wages are increased, small business owners who often operate on thin profit margins, would not be able to afford the increased costs of labor, which means they would be forced to fire workers or shut down entirely. While large multinationals could cope with the increase in minimum wage, small businesses would most likely not. As a result, since many low-level workers would be fired, they could lose their income entirely and hence, the increase in minimum wage could actually backfire and lead to massive unemployment.

Finally, even if companies deal with the increased payroll of their workers, they will most likely increase their price of goods to maintain profits. As a consequence, not only would this increase inflation, it would also make necessities like food, housing, and healthcare even more unaffordable for those living in poverty.

All in all, although the EU’s minimum wage policy is a very ambitious plan to improve living standards among Europe, it can very easily backfire, as the policy could have many economical disadvantages. Some countries, such as Austria and Denmark that do not adopt a national minimum wage system, would not even back the proposal due to the fact that their own system works well. In terms of Hungary, since the country sees its international advantage in low tax systems and cheap labor and can attract many multinational companies which give jobs to people, it is unlikely that the Orbán government would see the policy initiative as a benefit, although it is by no means still worth considering, as Hungary currently has the second lowest minimum wage standard in Europe.

Featured photo illustration by Vivien Cher Benko/Prime Minister’s Press Office/MTI


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