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Sunday, March 18, 2018

Raising the minimum wage will only further devastate the people of Ukraine

Ukraine continues to discuss an extravagant idea to sharply raise the minimum wage in the country – almost to the Russian level. As evidenced by the official Kiev, that would be an effective step in the fight against the shadow economy. If it works this recipe and whether it can be relevant in particular for us, for Russia?

Last week, Ukrainian Prime Minister Volodymyr Groysman made a sensational statement: “From 1 January 2017 no citizen of Ukraine will not get less than RS 3200. This applies not only to the private sector, but state”. We are talking about a two-fold increase in the minimum wage, which now stands at 1450 UAH and from December 2016 to reach 1550 UAH.

“Wages in the country will grow only on the most vulnerable citizens – janitors, cleaners, and all the rest salary will increase only officially”

The Prime Minister explained that the sum of 3200 UAH ($125, or about 7,900 rubles), follows from the calculations in the consumer basket. “For the first time in 25 years of independence the minimum wage will be equal to the real factual and legal living wage. This has never happened before. People always receive two times less than it is minimum necessary for life,” says Groisman future increase of the minimal wage.

This has not happened yet. And the big question is whether the minimum wage really doubled and, most importantly, what is the real effect it can cause.

All this has caused in Ukraine heated discussion. Therefore, in a video message Monday Groisman explained, due to which Ukraine is going to raise the minimum wage. He says that to improve the “minimal salary” will not involve a printing press, it will grow due to shadowing (elimination of shadow) wages. In the shade, according to him, it is about 50% of the entire economy of the country.

Also, the Ukrainian Prime Minister believes that it is important to decouple the minimum wage from all power structures. “The minimum wage should be directed to support the working person, and not to create a huge increase in salaries of officials”, – said Groisman.

From the point of view of social justice minimum wage in 1450 UAH or even 1550 UAH (from December) is the insufficient level of earnings for a citizen of Ukraine. Officially even the minimum subsistence level for able-bodied subject to tax on income of natural persons is 2900 UAH per month (a little more than seven thousand rubles). And here even does not include costs for utilities, which for the last three years in Ukraine increased by 4.5 times. According to experts of the “Ukrainian choice” Alexander Koltunovich, during the heating season for a Studio apartment will have to pay 2600 UAH per month, two bedrooms – over 4300 UAH, two – bedroom- almost 6000 UAH (about 15 thousand rubles).

The people of Ukraine over the last three years has seriously impoverished, given the level of inflation, the rate of which is two times ahead of revenue growth. In 2012 and 2013 the minimum wage was 140-144 dollar in 2014 fell to 103 dollars, in 2015 – up to 63 USD in 2016 (in nine months) to $ 54 (calculation of “the Ukrainian choice” according to the state statistics Committee and NBU).

Of course, this begs the increase in the minimum wage to combat poverty. But will it help the poor to get rich and then thanks to their increased income to spur consumer demand and spending, and then by the Ukrainian GDP? Apparently, this is what counts Groisman.

For starters: where are the Ukrainian government and business take the money to double the cost of salaries after the double growth of the minimal wage?

Deficit budget no money for that. On payment of increased minimum wages to $ 125 per month for 10 million working citizens of Ukraine requires 15 billion dollars a year, or 16% of the planned GDP of Ukraine. In the draft budget for 2017, GDP is expected to reach 95 billion dollars (that still need to be achieved, which is not easy).

In Ukraine there are only three ways to find the money. The first is credit. But who will give for such purposes the money the country actually defaulted on official debt? IMF feeds Ukraine their handouts (the third time they only gave me 1 billion dollars), and certainly not in order to raise the national standard of living.

The second way is to attract foreign investment. Here the same problem – no one in such high-risk assets, as Ukraine will not invest.

The third way is the emission of hryvnia by the state. This looks real to Kiev. But raising the minimum wage by the printing press – is not poverty or the underground economy, is pure deception. This in no way will lead to growth of welfare of inhabitants of the country. The launch of the printing press would mean the inflationary spiral, a new round of devaluation of the hryvnia and further depreciation of the real incomes of the population. In the end, the people of Ukraine can break even or even become poorer.

In Russia the minimum wage on average is 7.5 thousand rubles, but varies from region to region. For example, in Moscow it is 17.3 thousand rubles, in the Moscow region – 12.5 thousand rubles in St. Petersburg – 11.7 thousand rubles. In fact, Groisman proposes to raise the minimum wage in Ukraine to the national average (3200 UAH – about 7,9 thousand rubles). While Ukraine’s GDP is only 90 billion against $ 1.27 trillion dollars of the Russian GDP. Blown away the Ukrainian economy is not just pull the initiative Groisman.

“On the one hand, attempt to pull the economy out of the shadows is an initiative with a plus sign. On the other, Ukraine’s economy is not in the best condition, good prospects are not seen – that is, the conditions for the withdrawal of the shadow economy are not created. Today, such an initiative could spell shock for the Ukrainian economy”, – said the newspaper LOOK Vice-President of Russian club of financial Directors, managing partner of “2K” Tamara Kasyanova.

What would happen if private companies that are experiencing problems with orders and demand, forced to raise salaries to the new minimum level, shifting them from the envelope to the official salary? They will have to increase tax deductions, and so their dimming expenses go up. To survive, they will find a lot of ways to avoid rising costs. The obvious consequence will be rising unemployment, says Tamara Kasyanov. The budget of the organization, given the absence of money in the budget, will also go the way of cost optimization, that is the way of downsizing.

The second consequence is rising prices. Business to compensate for rising costs will be forced to increase product prices, the expert adds.

Most interesting is that, in fact, when making this decision, the salary increase only for the most disadvantaged citizens – janitors, cleaners, etc., and all other wages will rise only officially, says Kasyanov. In the end, because of rising prices, the people have to spend more while incomes remain stagnant or even fall, because citizens with the increase in the official part of the salary will also increase tax revenues.

As for the poor, due to the increase in their salaries in half they will cease to be needy and they will be deprived of the rights to receive subsidies. Thus, by the way, the state will receive additional funds in the budget to cover the costs of raising the minimum wage.

Another consequence is the depreciation of the hryvnia at the expense of inflation dispersal, said Kasyanov. Furthermore, the increase of the minimal wage can provoke even greater care of business in the shadows, because the increase in the tax burden is not due to economic growth, and through declarative action.

Suggested by Groisman recipe for poverty and shadow economy will not work, not only in Ukraine but also in Russia. Artificially raising wages without a confirmed real growth of the economy will only lead to more economic problems.

In Russia also there is no extra money to increase salaries. “To date, Russia’s budget deficit is reduced, it is necessary to spend reserves and increase domestic debt. Such a step, as a sharp increase in the minimum wage, the budget has no money”, – says Vadim Iosub of “Alpari”. However, Russia has no urgent need for such a step, because wages here are much higher than Ukrainian, he adds.

“Consumer demand is growing, when increasing income of people. But increasing the minimum wage by itself will not lead to higher incomes. Demand is being stimulated in other ways. For example, if the same Ukraine would find new foreign markets for their products – then it would lead to an increase in revenues and demand from the population. It’s the same with us,” – says the newspaper VIEW head of the laboratory for research in inflation and growth of the HSE, Vladimir Bessonov.

“Games with the minimum wage are not those drastic measures, which are able to make an impact. When the state strongly intervenes in such a sensitive area, it’s bad. Should be a natural market processes. For example, the government plays the “care” of all of us and say: let the minimum wage will be 100 thousand rubles. Imagine what the consequences will be. This will lead to the collapse of a significant part of the business, because many will not be able to survive with such salaries,” concludes Bessonov.


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