Economy 4 September 2024, 10:05am

Hungary may avoid another wage boom, skilled workers could fret

Portfolio

A wage agreement between the Hungarian government, employers and workers' organisations is being drawn up. The latest agreement in the Permanent Consultation Forum of the Business Sector and the Government (VKF) suggests that the minimum wage will increase substantially in the coming period, but the actual impact will not be gigantic. Instead of aiming for taking the minimum wage to 50% of the average gross wage, the goal would be 50% of the so-called regular gross wage or ex-bonus wage, which is substantially lower. There is certainly a serious argument behind this: an excessive wage hike programme would risk a wave of corporate bankruptcies and/or another inflation shock.

Although it had previously looked as though minimum wages could rise by an average of 18-20% annually over the next three years, much more modest wage increases of 12-13% are now being envisaged.

Economy Minister Márton Nagy was first to speak about the plan to raise the minimum wage to 50% of average gross earnings in three years. As the minimum wage has fluctuated around 40% of average earnings in the past - as shown by KSH data over several decades - it can be estimated that a minimum wage of around 440,000 HUF would be needed by 2027 to reach the target.

However, Portfolio later learned that this would be a faster wage convergence than the government intended, so the conditions are actually softer. In this case, an annual average minimum wage increase of only around 12-13% would suffice in the coming years, much lower than the 18-20% pace.

At the latest meeting of the Permanent Consultation Forum of the Business Sector and the Government (VKF), the parties agreed that they should aim for the minimum wage to reach 50% of the regular wage (ex-bonus wage) rather than the average gross wage. This does not include bonuses, one-off benefits or other rewards. As the average regular gross wage is about 10% lower than the average wage, and the minimum wage is already almost 44% of the ex-bonus wage.

Compared to what?
Regular gross earnings (as defined by the KSH) is the difference of gross earnings and non-regular earnings elements such as premiums, 13th month salary and bonuses. As of 2019, monthly regular earnings are partly calculated by statistical estimation. (See statistical documentation.)

While the minimum wage is around 40% of the average wage, it is nearly 44% of the regular wage. In other words, a catch-up of around 6 percentage points should be achieved instead of 10 ppts.

Portfolio calculates that the minimum wage would have to rise by an average of 12-14% a year to reach half of the average gross wage excluding bonuses and one-off benefits in 2027. This would bring the minimum wage to around HUF 300,000 next year.

We understand that this rate of wage increase is fully in line with the government's vision, so it could well be that at the VKF meeting it was the government that proposed aiming for 50% of the ex-bonus wage.

The exact average annual increase will depend on

whether the minimum wage actually has to reach 50% of the average wage (excluding bonuses) by 2027, or whether it is sufficient if the target is met by January 2028; and
whether the minimum wage has to reach 50% of the average wage (excluding bonuses) in that year, or whether it is sufficient if the target is met relative to the previous year's basic monthly salary.

The "minor changes" are certainly necessary because a particularly high rate of minimum wage increase (averaging around 20% per year for three years), which would actually raise the minimum wage to 50% of the average gross wage, would not be sustainable for all businesses, and could also reopen the problem of the price-wage spiral. The disadvantage of a forced wage increase of around 20% would be that inflation could be re-ignited, as companies could pass on the increase in wage costs to consumers. A more modest increase of 12-14% also carries such a risk, but of course less than an even faster wage increase.

The focus was not only on raising the minimum wage, but also on raising the wage minimum for skilled workers. In fact, in terms of the long-term consequences, it is even more important.

In the VKF meeting, there is growing agreement on the need to merge the minimum wage and the guaranteed wage minimum. This would in fact mean that the guaranteed wage minimum, the lowest wage for skilled workers, would disappear within a few years.

In other words, the guaranteed wage minimum would need to be raised by 3-4 percentage points less than the minimum wage each year if the goal is to equalise them.

In recent years, the minimum wage and the wage minimum have almost always increased by the same amount, but this year the "closing" has already started, with the minimum wage taken 15% higher and the minimum wage by only 10%. If this trend continues, as the VKF intends, we estimate that the minimum wage and the wage minimum could 'merge' around HUF 400,000.

Cover photo (for illustration purposes only): Getty Images