Three essential questions
How did minimum wage impact North Macedonia’s labour market?
In our series of interviews with leading researchers, economists and policy-makers, we interviewed Maja Gerovska Mitev, Professor of Social Policy at the Faculty of Philosophy, Ss. Cyril and Methodius University in Skopje, North Macedonia. She explains why the government decided to introduce minimum wage, what the impact was and also talks about the concerns social partners expressed related to its introduction.
1. North Macedonia introduced a minimum wage in 2012 with regular amendments in the following years, the last one taking place in April 2022. What were the key changes the government went for and what was the rationale behind it?
Despite the lack of more favourable economic growth, and in the midst of the post-Covid recovery, the government of North Macedonia succeeded, albeit arbitrarily, in pushing forward the minimum wage agenda. With the latest amendments adopted in February 2022, and effective as of April 2022, the government went for: a) 19.3% increase in the gross minimum wage; b) stipulation of a minimum ratio of 57% between the minimum wage and the average wage; c) a change in the methodology for determining the annual adjustment of the minimum wage; and d) specification of a new level of financial support for employers for the period March-December 2022.
The objectives of these measures were to advance the living standards and to reduce income inequality while compensating employers for increased labour cost. A particular goal was to improve the economic situation of low-paid workers in micro and small-scale enterprises, including commerce, the processing industry, and textile industry. According to the government’s estimate, the 19.3% increase in the gross minimum wage will increase the living standards of approximately 80,000 workers (10% of all employed). Second, the amendments intend to reduce the income inequality between the high, middle, and low wage earners. Namely, a stipulation of a minimum ratio of 57% between the minimum wage and the average wage, is an important reference introduced for the first time with these amendments. In February 2022, this ratio was 60% (State Statistical Office, 2022). Finally, to mitigate the increase in labour costs, the amendments to the Law stipulated financial assistance to employers for the payment of social security contributions, 1,197 MKD (€20) per worker, for the period March to December 2022. Following the amendments, employers eligible for the financial assistance are required to continue to employ the minimum wage worker for at least one year.
2. What is your assessment of the impact of regular minimum wage increases on income equality, reduction of poverty, and employment?
The latest increase of the minimum wage may help to significantly reduce the in-work at-risk-of-poverty rate. According to the latest (2020) data from the EU Statistics on Income and Living Conditions (EU-SILC), in North Macedonia 7.9% of all workers aged 18 years or above are at risk of poverty. This risk is even higher for workers living in households with children: 11.2% (versus 3.7% for workers living in households without children). The newly set minimum wage can be expected to reduce the in-work at-risk-of-poverty rate in general, and also among households with children (thereby also reducing the at-risk-of-poverty rate among children). As an illustration, for a household consisting of 2 adults and 1 child, the newly set monthly minimum wage (18,000 MKD, i.e. €293) is slightly higher than the 2020 at-risk-of-poverty threshold (16,515 MKD/ €269), both expressed in net terms. Similarly, the newly set monthly minimum wage is much higher than the 2020 at-risk-of-poverty threshold for a single parent with one child (11,927 MKD/ €194).
Increase of the minimum wage in the previous years has shown that the overall employment rate was not impacted. Yet, it may be expected that once the financial compensation for employers for the minimum wage payment is terminated, a certain number of jobs in the sectors, such as textile, footwear, and leather industries, will be at risk. With regard to informal employment in the country, which stood at 12.1% in 2021, the newest rise of the minimum wage has a potential lighthouse effect on the wages in the informal sector serving as a benchmark for a decent pay.
For the minimum wage to have wider impact, there is a need to better coordinate with other broader social policies and priorities. A lack of an integrated approach between the minimum wage policy (the previous 16% increase of the minimum wage in December 2019) and tax policy (roll-back of the progressive taxation in January 2020), not only sent mixed policy messages, but also contributed to an increase in income inequality of 0.7 percentage points (p.p.) in 2020 as compared with the previous year.
A non-integrated approach between the minimum wage increases and social protection benefits, can also have a detrimental impact on the access to social protection among vulnerable households. Namely, the 2019 national social protection reform gave certain categories of low-income household access to the guaranteed minimum assistance (GMA) and child allowance. Eligibility for these benefits is subject to a GMA threshold which depends on the household size and composition. Before the minimum wage increase, single parents with one child and couples with one child with incomes at the level of the (then) minimum wage had access to these benefits. Since the GMA threshold is not expressed in the legislation as a percentage of the minimum wage, every increase in the minimum wage, if not followed with an increase in the GMA threshold, leads to a progressive erosion of social assistance benefits for vulnerable households.
3. What were the main concerns of social partners and how did the Government deal with these concerns?
Not surprisingly, social partners had opposing views of the latest minimum wage increase. Employers were rightly concerned that the increase was not backed up by a similar growth of labour productivity and could lead to job reduction as a cost saving measure. Another concern of employers was that a reduced difference between the minimum wage and the average wage would lead to demotivation among the more skilled workers. The trade unions publicly demonstrated for a similar increase in other wage segments, most notably those regulated by the collective agreement in the public sector. The government resolved the issues by stipulating a financial support for employers who could not meet the costs of the increased minimum wage. Moreover, it increased the level of wages in other sectors, such as education, albeit as of September 2022.
The most recent increase in the minimum wage in North Macedonia shows the importance of considering the impacts on and interlinkages between the other wage segments, as well as the need to integrate the minimum wage policy with other broader social policy developments and orientations.