Economy 8 July 2023, 5:00pm

Hungarian earnings are worth bupkis, dismal EU report shows

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Despite a significant 16% increase in the gross minimum wage in Hungary this year, the purchasing power among minimum wage earners has fallen by the second highest rate in the EU due to record high inflation, according to a Eurofound survey. The annual report from the EU's social, employment and labour affairs agency shows that Hungary has one of the lowest minimum wages in the EU, both gross and net, and the average tax burden on gross minimum wages is the second highest in the bloc. Furthermore, Hungary has the highest rate of state deduction (tax wedge) on the minimum wage in the EU, in line with Romania, within the total labour costs.

Félnek a magyar cégek a minimálbér emelésétől

Hungary close to the bottom

Hungary's gross statutory minimum wage was the third lowest in the European Union in 2022, the annual review of minimum wages by Eurofound shows. The HUF 200,000 per month gross minimum wage corresponded to net HUF 133,000, which translates into 341 euros at the May 2022 EUR/HUF exchange rate.

the net minimum wage was lower than this only in romania (308) and bulgaria (282) last year.

At the other end of the ranking we find Luxembourg, Belgium, Ireland and the Netherlands, all with net minimum wages above €1600 last year. In Luxembourg, the top-ranked country, minimum wage earners took home nearly €2,000 last year, almost six times as much as in Hungary. However, when comparing the two figures, it should also be borne in mind that Luxembourg has higher living costs.

The Eurofound report does not do justice to the the situation in Hungary in that it does not mention the guaranteed wage minimum for workers in jobs requiring at least upper secondary education or vocational qualifications, although those employees represent a higher share than those earning the minimum wage

Last year, the gross amount of the guaranteed wage minimum was HUF 260,000, the net HUF 173,000. This year, the minimum wage for skilled workers has been increased by 14%, so its gross amount is HUF 296,400 in 2023, while the net amount is HUF 197,106.

The Eurofound report for last year's data shows the 21 EU countries that have set a minimum wage at national level by law in 2021. This year, the number has risen to 22, following the introduction of a statutory minimum wage in Cyprus at the beginning of 2023. (In the EU-27, the minimum wage is agreed between employers and unions at sectoral level or lower in Austria, Denmark, Finland, Italy and Sweden, rather than at national level.)

Comparing Member States on the basis of the gross hourly minimum wage, this year's data show that Hungary, with an hourly wage of less than €4, is the second to last out of the 22 countries surveyed in this group. Hungary beats only Bulgaria, where the hourly minimum wage before tax is €2.4. Luxembourg is also in the lead in this respect with a gross hourly wage of close to €14.

High tax burden in Hungary

The average employee tax rate (personal income tax and social insurance contributions) on gross minimum wage for a single earner without children ranged from 6% in Spain to 40% in Romania, but Hungary had the second highest figure at 33.5%.

In 2022, six countries – Croatia, Czechia, Greece, Malta, Portugal and Spain – did not apply PIT on the gross minimum wage. In Latvia and the Netherlands, the average PIT was very small (1% and 2%, respectively, on the gross minimum wage). Employee social insurance contributions (SIC, deducted from the gross minimum wage) were paid in all countries and the average SIC on gross minimum wage varied from as little as 0.42% in Belgium to 35% in Romania.

In five countries – France, Germany, Luxembourg, Malta and the Netherlands – minimum wage earners were entitled to in-work or social benefits. In France, they were entitled to receive an activity allowance; in Germany, a taxable lump sum energy transfer for workers; in Luxembourg, a heating allowance; in Malta, supplementary assistance and a one-time bonus; and in the Netherlands, a health care allowance. Therefore, in these five countries, the minimum wage earner’s disposable income (income left for a person to use after all taxes are deducted and benefits paid) was higher than their net wage.
Minimum wage earners in seven countries – Belgium, Estonia, France, Ireland, Malta, the Netherlands and Spain – kept 90% or more of the gross minimum wage. At the other extreme, only 60% of the gross minimum wage was received by Romanians and 66% by Hungarians. In five countries – France, Germany, Luxembourg, Malta and the Netherlands – the same group of minimum wage earners was entitled to in-work or social benefits in 2022.

Minimum wages can also be viewed from the labour cost angle. While PIT and employee SIC are borne by employees, employers also pay employer SIC on gross wages.The tax wedge on labour costs is the sum of PIT, employee SIC and employee SIC, minus any benefits received, which is expressed as a percentage of total labour costs. The Organisation for Economic Co-operation and Development (OECD) refers to the tax wedge as measuring the extent to which taxes on labour income discourage employment.

Overall, the tax wedge on minimum wages in 2022 was lowest in Malta (12%) and highest in Hungary and Romania (both 42%).

In Hungary, this rate is calculated as the employer pays a social contribution tax of 13% on the gross minimum wage, in addition to the 15% PIT and 18.5% social security contributions payable by the employee.

Inflation eats up wage increase

In 2023, Hungary's gross minimum wage rose 16% to HUF 232,000 per month from HUF 200,000 in 2022, while the net minimum wage went up to HUF 154,280 from HUF 133,000. This marks the fourth largest raise among the 22 member states examined. (In euro terms, however, due to the weakening of the forint, the gross minimum wage rose by only 6.8% to EUR 579 from EUR 542.)

The 16% nominal raise in Hungary exceeds the median nominal increase across EU member states, which was close to 11%, up from 5% last year. Latvia topped the list in terms of nominal minimum wage hikes, with a 24% raise in the gross minimum wage, followed by Germany (22.2% increase) and Romania (17.6%).

In Hungary, however, although the gross minimum wage increased by 16% in nominal terms this year, skyrocketing consumer prices (inflation exceeded 25% in January 2023 compared to the same period in the previous year) caused the minimum wage to fall by around 7% in real terms between January 2022 and January 2023. Of the 21 EU Member States surveyed, only the Czech Republic recorded a larger fall in the purchasing power of the minimum wage, with an inflation-adjusted fall of 10% in the real value of the minimum wage.

Across the EU, inflation was relatively high in 2022, so large nominal minimum wage increases in some countries typically did not lead to a significant increase in purchasing power for minimum wage workers.

Only a few countries, notably Germany and Belgium, are exceptions. However, it is also true that in most countries, unlike Hungary, the minimum wage has maintained or even increased its purchasing power. This means that, overall, the real wages of Hungarians with low incomes are falling sharply as a result of the exceptionally high domestic inflation, which is also high at EU level.