T. Šiaudvytis: Wages on the rise, but income inequality remains high
According to the latest European Union (EU) statistics, income inequality in Lithuania is the highest over the past eleven years. It was curtailed by wage growth in the fourth quarter of 2016, which, according to Statistics Lithuania, was 8.7 per cent. Quite a large share of this growth was driven by the twice-raised minimum wage last year. However, in order not to lose the country’s competitiveness, other ways to reduce income inequality should be considered as well.
Tomas Šiaudvytis, Senior Economist, Macroeconomics and Forecasting Division, Bank of Lithuania
Income inequality in Lithuania has been the highest since this data was first published, i.e. since 2005; moreover, it is higher than in any other EU country. However, 2016 data may change the view, as minimum wage increased particularly significantly last year – by almost 17 per cent. It was raised more only in 2008, while in comparison to other EU countries, in Lithuania the minimum wage was increased nearly the most.
The question arises whether this growth only pertains to those receiving minimum wage and skipping those who earn slightly more?
Growth in the wages of those earning the least was the strongest. For example, for the 10 per cent of employees with lowest earnings, wages grew by nearly 16.7 per cent (minimum wage grew by a similar amount).
Remuneration also grew for other employees earning relatively low wages. Wages of those in the second tenth increased by 14.4 per cent, third tenth – by 13.7 per cent, fourth tenth – 12 per cent. Overall, the higher the wage – the weaker its growth. For example, for the 10 per cent of employees with the highest wages, it grew the least – by only 6.1 per cent.
The increase of minimum wage not only increases the remuneration of those earning minimum wage, but of other employees earning slightly more as well. For the latter, wage is increased for fairness considerations: enterprises seek to ensure that the difference in wages between low-skilled and slightly more skilled employees does not become too small.
The conclusion can be drawn that wage growth contributed to the decline in income inequality last year; however, the data is insufficient for a final view of the developments in other income types (dividends, pensions, social benefits, etc.).
The increase of minimum wage may seem like a good tool to reduce income inequality, poverty, shadow economy and accelerate wage growth. However, this tool has a side effect: strong remuneration growth and rising cost for enterprises may reduce the competitiveness of Lithuanian exporters in foreign markets.
An almost 9 per cent rise in private sector wages and salaries raises doubts as to whether we can further increase the minimum wage this fast. It is worthwhile to consider other ways to reduce income inequality as well. It might make sense to strengthen the bargaining power of those earning the least, to increase social assistance, only providing it to those really in need. The availability of quality education could also reduce inequality by providing possibilities for work requiring higher skills.