Moldova sees increase of the minimum wage by May 1st 2014 – good news, but not for everyone?

Publishing date: Thursday, 01 May 2014
Views: 19937

On April 23rd 2014, the Moldovan government approved a decision to increase the guaranteed minimum wage with 250 MDL in the real sector. Thereby, as of May 1st 2014, it will reach the 1650 MDL per month mark. Even though the regulation is good news for some categories of workers, it involves some sensitive moments too. This short commentary includes recommendations for future decisions of the government of Moldova in this respect.

Moldovan government regularly increases the minimum wage, but it does that differently to the real and budget sector, setting higher requirements to the real sector. Although the practice of establishing a legal minimum wage exists in most EU countries, however, the common practice is to set a unique minimum wage, regardless of the sector in which the worker operates. Otherwise we have a discriminatory practice for different employers. The main argument the government uses to impose higher minimum wage requirements for private sector – the lack of financial resources, is also applicable to some representatives from the private sector. Once approved by the Government, this new requirement quickly enters into force, giving private businesses and the real sector of the state very little time to plan the future pay rolls.

Recommendations for Moldova include the following two key points:

  • Where the state sets a legal minimum wage - the minimum threshold must be unique for both real and public sector;
  • Any decision in this area must respect the principle of predictability in business. In particular, it requires  a sufficient period of time between the approval of a higher legal minimum wage and its entry into force (eg  at least several months, instead of only seven days since its approval, provided to employers for planning in 2014)

Assessing the impact of this decision. An increase of the minimum wage in the real sector would entail a certain increase of the median wage, given that some companies sign employment contracts stating the minimum wage, while the rest of the salary is paid "under-the-table". Thus, we anticipate positive effects too, such as a partial reduction of ‘’cash-in-hand’’ payment phenomenon, which will allow the growth of social security contributions. However, we must not forget that the minimum wage is, by definition, an administrative measure, which the state uses to intervene in the labor market; this could result in increased costs and reduced corporate profitability, with possible consequences on the amount of income tax collected in the medium and long term. Eventually,  if the minimum wage increases too fast, such decisions can endanger young workers with lower labor productivity and could sometimes lead to non-renewal of the short-term work contracts, reduction in  the number of job openings and cancellation  of additional premiums , bonuses , etc. by businesses .

This material has been developed by the Independent Think Tank EXPERT-GRUP with the support of the Open Society Foundation, within the 2013/2014 Institutional Support project. Authors are solely responsible for the views and opinions expressed in this document, which may not be necessarily shared by the donors.

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