Bank of Lithuania
2017-11-24
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Average wage growth has been on a downward path. Having reached almost 9% in the previous months of this year, annual wage growth stood at 7.2% in the third quarter. This was largely related to the fact that the July 2016 minimum wage increase no longer affected annual wage growth.

Tomas Šiaudvytis, Senior Economist at the Macroeconomics and Forecasting Division of the Bank of Lithuania

Not all worker groups saw similar deceleration in their wage growth. The annual wage growth of a quarter of the lowest-paid workers has declined – from 10% in the first half of the year to 4% in the third quarter. Yet wages of a quarter of those earning the most have continued growing at a similar pace as before – by approximately 7%.

Such trends stemmed from a relatively good situation of high-skilled and -educated workers in the labour market. Amounting to 2.9%, the unemployment rate of such individuals has decreased, almost reaching the level recorded in the boom years. Such unemployment leads to a considerable shortage of highly-skilled workers and their better position to negotiate a higher wage.

Lower-skilled and -educated workers are in a less favourable labour market situation. After the economic crisis, demand for such workers has not been increasing as fast as demand for high-skilled and -educated labour force. This is evidenced by their relatively high unemployment rate. For example, the unemployment rate of persons with no tertiary education is twice as high as the rate recorded during the economic upswing of the last decade and stands at 11.5%.

Against this backdrop, the bargaining power of lower-wage earners is not very high. Hence in recent years the growth of their wage has largely depended on minimum wage dynamics. This raises the minimum wage setting question.

On the one hand, Lithuania faces problems related to income inequality and poverty. A properly-set minimum wage could help solving them. Nonetheless these problems are rather complex, thus relying only on the minimum wage would most likely be ill-advised. Other measures should also be applied to, for example, increase efficiency and relevancy of social assistance, ensure that the education system is more suited to the needs of the economy, etc. On the other hand, if the minimum wage is raised too much, some companies might start increasing the prices of goods and services more rapidly or experience difficulties in competing with foreign producers.

Thus, when setting the minimum wage, we should find a balance between the social needs of the country and the ability of the firms to pay a higher minimum wage. It is equally important to avoid the politicisation of the minimum wage setting, i.e. a situation when it is used for other purposes than solving economic and social problems. The politicisation of the minimum wage might be scaled down by linking the minimum wage with the average wage at a certain fixed ratio. This would ensure that, with wages rising, the minimum wage would increase on its own, creating fewer opportunities to use it for political purposes.