On the ratio between the size of the minimum wage and the subsistence minimum

The objective of the short analytical note “On the ratio between the size of the minimum wage and the subsistence minimum” is to show the consequences of the increase of the minimum wage which should be taken into account by the government when developing follow-up policies on the labour market.

Due to the mental link of the minimum wage (MW) and the consumer minimum, the increase in MW can be interpreted by the society as its indexation of the increase in the cost of living, which will form expectations for an appropriate adjustment of the subsistence minimum and inflationary expectations.

Therefore, an increase in the minimum wage is likely to increase the expectations of the society for raising the level of all social benefits. According to the State Statistics Committee, in 1Q16 vs 1Q15, the average wage in the income of the population increased by 15.4%, while the social aid – only by 8.1% [1], Thus, the gap between the incomes of employed Ukrainians and those living at the expense of social payments increased. In case of retention of this trend, it will strengthen the expectations of recipients of social benefits for their indexing.

A sharp increase in the minimum wage will require escaping from the Unified Tariff Scale for remuneration of public servants and budget employees (it requires some changes in the legislation, namely, the Civil Service Law, which should precede the initiatives to radically increase the minimum wage), as well as the solution of issues of the amount of fines, declarations, etc. related to MW.

[1] CES calculations based on the data of statistical bulletins “Spending and resources of households in Ukraine” http://www.ukrstat.gov.ua/druk/publicat/kat_u/publdomogosp_u.htm