Number of low-income workers falling fast

Photo: Urmas Luik

If five years ago, Estonia had over 167,000 people making less than the current minimum salary of €540 a month, that number has been cut in half by today, to 88,515. The number of high-income workers has more than doubled in that time.

Data from the Tax and Customs Board suggests the last five years have seen the number of people making under €1,000 a month fall and that of people making over €1,000 grow. The number of people making over €2,500 a month has grown the fastest, from 21,243 in January of 2015 to 53,475 in August of this year.

Analysts say that median income has been growing faster than average salary for years. Median income is the amount that divides the income distribution into two equal groups, half having income above that amount and half having income below that amount.

The average salary has been growing by about 8 percent a year since 2003, while median income has grown by 8.9 percent a year.

“Median income has grown by 34 percent in the past four years. Therefore, it is understandable that the number of low-income workers has decreased and that of people making a better salary increased,” said Tõnu Mertsina, chief economist for Swedbank.

“While the 2018 income tax reform boosted the net income of people making under the median salary, it has not had a major effect on the general trend,” he added.

Chief economist for Luminor Tõnu Palm said that the statistics also raises questions as the fact there are 78,000 fewer people in the minimum salary segment (wages of up to €540) is not reflected in the following salary grades (€541-750).

Minimum salary not attractive

“Contracts for services and other structural changes could have a hand in this, including payment under the table, but it is not enough to explain the whole truth,” he said.

“Faster growth in higher salary grades is logical in that if we see even salary advance percentages across the spectrum, it translates into more money for the top end,” said the leading economist for SEB Mihkel Nestor.

“The lower end has shrunk courtesy of minimum wage hikes that likely also affect people making a little more,” he added.

When the previous coalition came out with its new income tax system two years ago, several analysts forecast that the change would slow down growth of average salary as it was believed a lower effective income tax rate would reduce salary pressure on employers from low-income workers. That did not happen and salaries, especially in the lower end of the spectrum, have kept growing. Median income jumped 10 percent in Q3 of 2018 and 2019 and Q2 of this year. The last time growth of median income was this fast was during the economic boom of the previous decade.

Inequality lower than in Latvia, Lithuania

In order to ensure continued rapid salary advance, Estonia needs more jobs and labor supply through smart investments and structural reforms.

“Skillfully picked investments into labor and smart infrastructure help sustainably boost income in the long perspective. Therefore, it is very important where and how effectively we invest tax money in the conditions of slowing growth,” Tõnu Palm from Luminor explained.

His Swedbank colleague Tõnu Mertsina said that another important thing about these salary ratios is that income equality (relative importance of people in the highest and lowest quintile of earners) is down in Estonia.

“Last year, income equality in Estonia was higher than in Finland and Sweden, but lower than in Latvia and Lithuania,” he said.