Fidesz election ploy will drive SMEs out of business, warn critics

November 28, 2016

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“We are confronted by an election trick that could trigger a wave of significant wage increases that would cause real problems for those companies which employ people in the vicinity of minimum wage.” – András Vértes, president, GKI Economic Research Zrt.

Commenting on last week’s decision by the Fidesz-controlled parliament to increase the minimum wage for unskilled and skilled workers 23 percent and 32 percent, respectively, in the run-up to the 2018 election, VOSZ (the National Association of Entrepreneurs and Employers) general secretary Ferenc Dávid objected to this being done almost entirely at the expense of employers, as the 5 percent decrease in employer payroll contributions intended to partially compensate them for higher labor costs will be largely offset by higher value-added tax revenues and other payroll contributions.

“If we want to improve competitiveness and employment then we need leave the money with the companies in the form of a decrease in payroll taxes so that they can decide whether to increase wages, hire people or invest in technological improvement,” Dávid told print weekly 168 óra shortly after the government announced that it had agreed with its “social partners” (the so-called Private Sector and Government Standing Consultation Forum) on a 15 percent increase in minimum wages in 2017 and an additional 8 percent increase in 2018.

Dávid advised against increasing the wages of so-called public workers, warning that the HUF 20,000 (USD 70)  difference between their net monthly wages (HUF 53,000/USD 185) and the minimum net wages of private sector employees ( HUF 73,000/USD 255) to be insufficient motivation for public workers to find regular jobs in the private sector.  “They would rather wobble in public work and then work under the table,” says Dávid.

He said the government’s proposal to push up the entire wage scale was a sensitive point.

“If I increase the minimum wage and that of skilled workers, then I cannot increase the wages of people over them who are earning low wages, which means I’m practically giving up the possibility of incentivizing them,” says Dávid, pointing out that in such cases the business owner can either downsize or start paying employees under the table, in which case “differentiation among employees” takes the form of “envelopes stuffed with money put in their pockets.”

The organization representing the interests of small- and medium-sized companies announced that the government’s proposal to increase the minimum wage 23 percent over the next two years has serious implications for the entire sector.  According to the calculations of the Hungarian National Trade Alliance, the increase will cost companies an additional HUF 16,289 (USD 58) a month in the case of unskilled workers and HUF 34,991 (USD 122) in the case of skilled workers.  It says this is only possible with offsetting decreases in obligatory employer payroll contributions.

Especially affected will be micro-, small- and medium-sized companies where personnel costs exceed 50 percent of total operating costs.  For this reason the organization predicts that many thousands of small companies will be forced out of business.  Hypermarkets, by contrast, are unlikely to be affected as they have been increasing wages in response to growing labor shortages.

Large companies employ roughly one quarter of all people working in the private sector, whereas the micro-, small- and medium-sized sector, known as the kkv sector, employs the remaining 75 percent  The National Trade Alliance warns that if the government places unreasonable burdens on the kkv sector, then the number of employers and work places will decrease significantly.

“We are confronted by an election trick that could trigger a wave of significant wage increases, and would cause real problems to those companies which employ people for minimum wage or slightly more,” warns András Vértes, the president of GKI Economic Research Zrt.  He says that in the case of a ten-person company it is not possible to increase the minimum wage without also increasing the wage of those already earning a few thousand forints more a month.  Without greater cuts to obligatory employer payroll contributions, raising the minimum wage will only result in a growth in the grey economy at the expense of competitiveness, says Vértes, disputing the government’s claim that higher wages will enable small companies to hire more skilled workers and prevent them from going abroad.  “It is not those in the low-wage category who go abroad but rather the more highly trained who leave the country.  Nor is it true, as Prime Minister Viktor Orbán claims, that a dramatic increase in wages will improve the competitiveness of Hungarian companies and the country, says Vértes.

The economist says it is not low wages which pose the main problem but rather Hungary’s poor prospects for development.  He points out that it was billions of euros in EU fiscal transfers which enabled Hungary’s economy to grow 4 percent last year and some 2 percent in 2016, and that Hungary is not prepared for the period following 2020.  Vertés says that, after adjusting for the recapitalization of Hungarian banks by their foreign owners, for six years there has been no net increase in capital flows.

He says that if the government examines the determinants of the world competitiveness ranking, Hungary’s competitiveness has little to do with low wages and more to do with other factors such as education, whether children are learning how to learn and adapt, and whether they are capable of teamwork and compromise.

Hungary’s world competitiveness ranking has fallen from 48th in 2011 to 69th in 2016.  By contrast that of Poland has increased from 41st to 36th and that of the Czech Republic from 38th to 31st.

Other experts point out that wages were increasing anyway and the decision to raise the minimum wage was merely the government’s way of taking political credit for it, as both the Hungarian Socialist Party and Jobbik have been calling for higher wages for some time.

The decision to substantially increase the minimum wage in the run-up to the 2018 election is likely to appeal to voters who manage to retain their jobs, while those who fall victim to downsizing are unlikely to understand that this was a direct result of a higher wage environment, warn critics, who are especially concerned about the impact of higher minimum wages on the ability of unskilled workers and those suffering discrimination in the workplace – including older employees, young Roma and women raising small children – to find and retain employment.  They also point out that providing for those who fall out of the labor market will add to the state’s burdens.

However, if the recent past is any indication, Hungary’s so-called leaders do not really care about what happens to these citizens, which helps explain why 42 percent of the country is either living in or on the edge of poverty.