Fr, 2.12.2022

A new law would bring a 34-percent wage rise overnight

Liina Laks
, majandusajakirjanik
A new law would bring a 34-percent wage rise overnight
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In Estonia, it is not yet clear whether in the future the minimum wage will be calculated according to the median wage or the average wage.
In Estonia, it is not yet clear whether in the future the minimum wage will be calculated according to the median wage or the average wage. Photo: Arvo Meeks / Lõuna-Eesti Postimees
  • Estonia’s minimum wage is among the lowest in Europe.
  • Comparison of minimum wages must consider specifics of taxation.
  • Median wage provides a clearer image of standard of living.

In exactly two years, Estonia will have to adopt the European Union's wage law, which will increase the wages of two very opposite groups, i.e. the minimum wage earners and the politicians.

Currently, the gross minimum wage in Estonia is 654 euros. If the law were to come into force tomorrow (member countries of the EU are allowed to delay its introduction until November 2024), the salaries of many Estonians would leap upward. Since the directive stipulates that people can only be paid an adequate wage, which is set as 60 percent of the median wage (the wage level of which half of Estonian workers earn less and half earn more) or 50 percent of the average wage, according to the current amounts, this change would lead to an increase of the minimum wage 34 percent, or 877 euros.

Estonia's minimum wage is among the lowest in the European Union. Among the 21 countries which reported salaries to Eurostat, Estonia ranks 14th; even Lithuania rushed us by this year with the minimum wage of 730 euros while inflation is comparable to Estonia. The best in Europe is Luxembourg, where they manage to pay a minimum wage of more than 2,300 euros. It must be taken into account here that these are gross amounts and what people actually receive depends on the tax exemptions of each country.

In addition to the minimum wage earners, those in the occupations whose wages are linked to the minimum wage would also benefit from this large wage rise. Fees for municipal services, such as nursery school fees, and parental benefits may also be affected. Indirectly, it also affects the salaries of politicians, because the pressure on the minimum wage is likely to create an urge to earn more among the average wage earners.

The Trade Unions Confederation likes the law, although the details still need to be worked out in Estonia. First of all, how large an amount would constitute adequate wage. The head of the confederation, Jaan-Hendrik Toomel, pointed out that the trade unions would prefer this number to be 60 percent of the median wage. However, Statistics Estonia has kept the median salary a secret for the past few years and instead sends inquirers to a website where you they compare their salary with that of other representatives of the same field of life. The median wage is significantly lower than the average wage and it gives a more objective picture of the wages paid in the country, because the average wage amount can be artificially inflated by a very small number of very high salary earners.

What should one receive for this money?

According to Toomel, what adequate wage should enable is even more important than the actual amount: “Adequate wage allows an employee to participate in social life in addition to economic survival – to go to the theater, engage in hobbies and be self-sufficient, for example renting an apartment. It would be good if they can also save an amount of three to six monthly wages for rainy days," Toomel explained.

The CEO of the Confederation of Employers, Arto Aas, is more critical of the law; he focuses on the economy in general rather than the aspects of adequacy of wages. “The directive will not provide for a single European Union minimum wage amount, a number or a coefficient. This was never planned,” Aas emphasized.

He explained that the amount of the minimum wage depends on each country's system, and in the case of Estonia, wages are agreed upon by the so-called social partners, i.e. the confederations of employers and trade unions. “Since the social partners of the member states are the best acquainted with the labor market of the member state, they are also the most competent to agree on the minimum wage,” said Aas.

He sees a whole range of dangers in the implementation of the law. "When the minimum level is determined by law, there is a risk that if this level becomes too high, it will be too much for the employers and thus people may lose their jobs. The annual minimum wage negotiations, for example, usually revolve around finding an optimal level or a reasonable rate of increase. The impact analysis of the European Commission has pointed out that raising the minimum wage to 50 percent of the average wage or 60 percent of the median wage in Estonia would increase unemployment by nearly 7,000 people,” said Aas, in whose opinion employers want the people to be able to earn as much as possible, but the prerequisite for this is the employees raising their qualifications and, on the other hand, increasing the added value of companies.

“The minimum wage in Estonia has generally grown faster than the average wage and inflation. Also, there are only a few percent of minimum wage earners on the labor market, and this does not characterize the wage levels in Estonia as a whole,» said Aas.

How many people would have their wages increased by the directive?

Therefore, would the wage of only a few thousand people affect the functioning of the entire Estonian state? According to Kadri Rootalu, a data scientist at the Statistics Estonia, a very large number of employees were excluded from the latest wage statistics. Otherwise, there have always been well over 600,000 employees in Estonia, but this time employees with commission and other contracts, part-time employees and the personnel of the police and the Ministry of Defense had to be excluded from the statistics, explained Rootalu. Thus, according to the data of the second quarter of this year, the workforce decreased to 461,700 people.

The picture becomes interesting when looking at how many people earned up to one thousand euros gross per month – they amount to 18 percent of wage earners, or 83,300.

A gross salary of one thousand euros means that a person receives 871 euros on payday. If one has to rent an apartment, pay utility bills, buy food and raise children for this amount in Tallinn, then the sum no longer seems compatible with the vision of the Confederation of Trade Unions as a salary with which a person can go to the theater and cinema and save up to six months' salary.