Economy 24 January 2023, 3:15pm

Major trouble with Hungary's minimum wage, EU agency sends warning

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Despite nominal increases in statutory minimum wages reaching an all-time high between January 2022 and January 2023, the purchasing power of minimum wage workers in most EU countries is declining or just about compensating, according to preliminary inflation data. The situation of Hungarian workers is among the worst in the EU, with Hungarian wages falling significantly despite the increase. Eurofound warns of serious problems.

The economic bounce back from the recession caused by the 2020 coronavirus outbreak has resulted in a high inflationary environment, exacerbated by the start of the Russian-Ukrainian war last year. Wage setting actors were forced to make their decisions under a cloud of uncertainty, relying only on predictions. Despite this, record minimum wage increases in nominal terms have been implemented across the EU, but these do not seem sufficient to preserve purchasing power.

Nominal rates have increased across most Member States, ranging from more than 20% in Germany and Latvia to over 5% in France, Luxembourg and Malta. The only countries where nominal rates have not increased in January 2023 are Spain, where negotiations are still ongoing, and Cyprus, where a statutory minimum wage has just been introduced.

In most countries, the increases have not exceeded the rate of inflation and, as inflation accelerates, workers could be worse off, according to a recent report by Eurofound, the EU agency looking at working and living conditions and the quality of life in the bloc.

The monthly statutory minimum wage converted to 12 monthly payments in euro is the highest in 2023 in Luxembourg (EUR 2,387), followed by Germany (EUR 1,981) and Belgium (EUR 1,955).

It is the lowest in bulgaria (eur 399), Hungary (EUR 579) and romania (eur 606). wage increases are thus a lot greater than last year and incomparably larger than in the preceding years.

Across the Member States (excluding Spain), the average nominal increase in 2023 is 12%, compared with around 6% last year (between January 2021 and January 2022). The median increase in 2023 is 11% so far, more than double the 5% of the previous year.

Minimum wages have generally risen more among central and eastern European countries, marking a continuation of upward EU convergence over many years. Latvia hiked its minimum wage by almost 25% in 2023 (after having frozen it since January 2021). In addition, out of the 13 countries with the biggest increases, 10 are Member States that joined the EU after 2004. Eight register increases above 10%, while the other two, Bulgaria and Slovakia, come close to that figure.

In terms of nominal increases, Hungary is among the EU leaders at 16%. But this is coupled with an annual average inflation rate of 14.5% in 2022.

Among the pre-2004 Member States, minimum wages have generally risen more modestly, with increases of 5–8%. The exceptions are Belgium, Germany and the Netherlands. Germany (22%) and the Netherlands (12%) have set higher increases largely due to a deliberate policy intervention aimed at improving minimum wage levels. In Belgium, the 16% increase arises mainly from the implementation of several automatic indexation mechanisms from January 2022. Besides raising the minimum wage, most governments introduced other measures to support citizens (predominantly the low paid, but not exclusively) to cope with the increased cost of living.

Purchasing power falls

Despite the abnormally large increases for 2023, the obvious question emerges: will they be enough to improve the purchasing capacity of minimum wage earners? For many countries, the answer is no, Eurofound said.

"The nominal hikes in January 2023 may not be enough to avoid significant falls in purchasing power among minimum wage earners in some central and eastern European countries affected by high inflation rates (Czechia, Hungary, Slovakia, Estonia and Lithuania)," it said.

It is important to bear in mind that this assessment of the purchasing power of minimum wages considers only the extent to which the new nominal rates set in January 2023 have been able to offset the impact of price growth up to that point. But, given the likely persistence of inflation as the year progresses, a further deterioration in minimum wages in real terms is to be expected across the Member States, unless further increases in nominal rates take place,

the analysts added.

As regards Hungary, Eurfound noted it was positive that the peak-level social partners came to an agreement within the tripartite social dialogue body (the Permanent Consultative Forum of the Private Sector and the Government, VKF). The agreement sets a first rise in January, with an additional clause to review the increase mid-year if inflation increases to 18% and GDP growth is positive. In addition, the government agreed not to increase the social contribution tax on wages. In this regard, the Hungarian solution is unique, as no other countries made a similar pre-agreement on a review.

Conclusions

The high nominal increases in minimum wages between January 2022 and January 2023 will not for the most part translate into significant increases in real terms. Even if rising inflation slows in 2023, it is likely to remain well above the price stability target of 2% per annum, and a further depreciation in the purchasing power of wages can be expected, except where they are increased within the year.

The wage setting regimes did not make any major changes in their practices in light of the inflationary pressures. Only one of the Member States with an automatic indexation mechanism (Luxembourg) has not fully applied the increase calculated by the mechanism. In the other Member States, it was applied as usual. Debates about changing this mechanism – which pre-date the inflationary context – continued.

Unions in most countries asked for inflation to be taken into account or to be more central to the negotiation, some calling for more automated mechanisms, while employers argued for caution and maintaining predictable updates so as not to overload labour costs.

In the case of Hungary, it is particularly worrying that, according to Eurostat data, the median per capita income of a Hungarian household in 2021 was the fourth lowest in the European Union. The indicator shows that the spending capacity of a median Hungarian citizen is roughly half the EU average and 15% higher than that of a Romanian, while the Austrian indicator shows two and a half times greater prosperity. This is compounded by the fact that minimum wages are at the bottom of the earnings bracket, with higher salaries pulling the average upwards.

In other words, after the already high inflation in 2022, even the 15% inflation expected by the government this year could hurt minimum wage earners.