Minimum wage level: the experience of Romania and the Republic of Moldova

Minimum wage is the lowest wage, daily or monthly, that an employer can offer, in accordance with the law of the state in which they operate. It aims to reduce social and wage inequalities. At present, the minimum wage law applies to over 90% of the world’s countries.

Over the past few years, we have witnessed substantial increases in the minimum wage as a result of absorbing the recessionary disasters caused by the 2008 crisis. Thus, the increase in the minimum wage has generated a number of positive or negative effects.

Republic of Moldova:

In 2018 minimum wage in Moldova reaches the amount of 2,380 lei/month, about 4 times higher than in 2008, in which the minimum wage was only 600 lei/month, even lower than the subsistence minimum (900 lei/month). This led to the doubling of the disposable income of the population (1 188.75 lei/month – 2008 and 2 363.85 lei/month – 2018), respectively to the increase of the private consumption (from ~ 1 227.6 lei/month in 2008, to ~ 2 354.45 lei/month in 2018) and on improving the standard of living of citizens.

One of the consequences of the increase of the minimum wage in the Republic of Moldova is the displacement of the employed population from the formal sector of the economy, to the informal sector, a sector that represents the undeclared economic activity and is not subject to the payment of taxes and taxes. Thus, there is an increase in employment in the informal sector, a process that leads to an increase in the share of the underground economy in GDP. Analyzing the case of the Republic of Moldova in the context of the above, we can say that the number of people working in the informal sector has increased considerably (~ 65,400 persons). According to the National Bureau of Statistics of Moldova, in 2008 there were about 353.5 thousand persons employed in the hidden sector of the national economy, while in 2017 – 418.9 thousand. The fact that about a quarter of the country’s population is working in the shadow economy sector leads to the uncorrelation of public policies with the real economic situation in the country, to the increasing frequency of tax evasion and, implicitly, to the growth of the underground economy in GDP.

Romania:

In recent years, Romania has seen many increases of the minimum wage, focusing on the concept named wage led growth (economic growth based on the wage growth). In 2008, gross minimum wage was just 540 RON per month. Gross value continued to raise in 2009, increasing by 11,11% (RON 600 / month), but stagnating in 2010. During 2010-2017, the minimum wage growth in Romania has risen steadily, the minimum wage has an increase of 125% in 2017 compared to 2010 (from 600 RON / month to 1 450 RON / month). In 2019, the minimum wage will be increased again from 1,900 RON / month in 2018 to 2,050 RON / month for 2019.

Starting from analyzing the evolution of the minimum wage in both states, the Worldwide Moldovan Business Association appreciates the social measures approved by the public authorities in Romania and the Republic of Moldova, at the same time, we consider that the continuous upward trend is not correlated with the rate of economic growth, as well as average with labor productivity. Correlation of the above-mentioned factors will lead to the setting of an optimal minimum salary that will be gainful for employees, but at the same time, it will not lead to an increase of the fiscal pressure on the employers’ shoulders.

MBA (Worldwide Moldovan Business Association) believes that the maximum rate of minimum wage growth will generate shocks for somen companies, where most of the employees are paid with the minimum wage, and shocks are reflected in increased transaction costs, so entrepreneurs are adopting escapist behavior and are moving to the informal sector. Even if it seems that the measure taken exclusively for the benefit of the citizens, this continuous increase of the minimum wage both in Romania and in the Republic of Moldova can be interpreted differently. The closeness of the electoral elections in Moldova and the desire to improve the image among voters from the ruling parties in Romania leads to the idea that the increase of the minimum wage was made precisely in order to regain the confidence of the citizens. Unfortunately, raising the minimum wage will not be felt quantitatively in the “pockets” of citizens, as wage growth also comes as a response to the correlation of purchasing power with the rise in market prices, and which does not even increase fairly towards consumers. In fact, another negative effect would be the increase in the budget deficit, which would later be covered by the resources of the citizens.

The solution, in the opinion of the Worldwide Moldovan Business Association, could consist in maintaining a dialogue between the state – trade unions – employers in order to reach an agreement on the minimum wage, which would be advantageous for all participating parties but at the same time, to ensure the good functioning of the economy. Even if the economy of the Republic of Moldova and Romania has experienced a recovery, businessmen still face a number of impediments, some even artificially created. Identifying solutions to solve them must be the number one priority for policy-makers, which affirms that business is the engine of a functioning economy, but it is operationally far too few steps to support the entrepreneurial environment.

The Worldwide Moldovan Business Association supports the fact that the minimum wage should be increased, in order to improve the living standards of the population, especially in disadvantaged areas both in Moldova and Romania. At the same time, we stress that even if the economies of the two states have experienced a recovery, business people still face many difficulties in both countries. MBA considers the need and usefulness of an efficient business system to be extremely important, the functionality of which would be unconditionally felt in the good development of the economy.

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