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The devastating impact of raising the minimum wage or heading for economic collapse

At the beginning of the year, Slovenia experienced the largest nominal jump in the minimum wage in this millennium. According to the predictions of Minister Luka Mesec, it will already increase by around 100 euros net in January. Employers are worried. “This will be a huge additional burden on businesses,” they said.

In the first half of January, it will be finally known what the minimum wage will be for the first month of this year. If the predictions of the Minister for Labour, Family, Social Affairs, and Equal Opportunities are true, that the minimum wage will be around 100 euros higher, the gross amount will be more than 1,200 euros, the total cost to the employer will exceed 1,400 euros (there are between 40 and 50 thousand recipients of the minimum wage in Slovenia). Employers’ predictions are that they will have to lay off workers, as they will not be able to afford this cost, banks warn that due to the increase in the minimum wage (and social transfers) the creditworthiness of employees who receive an average salary will decrease, and some will become uncreditworthy (families with three children). The problems do not stop there.

Concerned employers

“Given the energy costs faced by companies, an increase in the minimum wage above the statutory limit is definitely an additional burden for companies,” said the Chamber of Craft and Small Business of Slovenia. The Chamber of Commerce and Industry of Slovenia (GZS) pointed out that this year, when economic growth is expected to be significantly lower than last year due to the energy crisis, will be very unstable. “Nevertheless, companies will pay several times higher costs for energy products and higher costs of input materials. Inflation and the energy crisis generally increase the operating costs of companies. In such conditions, it will be difficult for Slovenian companies to be competitive. Therefore, the economy expects an increase in the minimum wage within the limits set by the law, which the companies anticipated when they were preparing their business plans,” added the GZS.

Beyond capability

By raising the minimum wage, Slovenia will come closer to the most developed countries. In terms of the gross amount, it will be less than 200 euros behind France and less than 700 euros behind Luxembourg, which has the highest statutory minimum wage. There is nothing wrong with this, the problem is that these countries are far ahead of Slovenia in terms of gross domestic product and much richer, so they can afford such a minimum wage. Slovenia, for example, reaches a good 21 percent of Luxembourg’s GDP per capita and 64 percent of France’s, and with an increase in the minimum wage, Slovenia will reach a good 60 percent of Luxembourg’s and almost 88 percent of France’s minimum wage; that is to say, the state will impose on employers a cost that far exceeds their capabilities.

The minimum wage will now reach almost 60 percent of the average Slovenian wage (in 2000, a good 40 percent, in 2010, 45 percent). This means that Slovenia is following the path of socialist equalisation of salaries, when it is no longer important how much and how well someone does what, but almost the entire working population has the same salary.

Raising the minimum wage has harmful long-term effects on the economy. A large proportion of the working population performs jobs that do not have a large added value. An additional load can cause the added value to be negative. This, in turn, means liquidity problems and ultimately the bankruptcy of the company, or in the best case, the dismissal of workers (the number of unemployed has already increased in December, this year it is expected that there will be even more). Leftists like to point out that a company that cannot pay its workers a (high) minimum wage does not deserve to exist at all. However, this is more indicative of their very poor economic knowledge than the poor work of the companies. You know what the famous economist Friedrich von Hayek said: “If socialists knew economics, they would not be socialists.”

A decline in creditworthiness

A large increase in the minimum wage will also have a negative impact on those who have a monthly income at the level of the average Slovenian wage (according to data for October last year, €2,024.03) and would like to take out a loan from the bank. But their creditworthiness depends precisely on the level of the minimum wage; according to the decision of the Bank of Slovenia, 76 percent of the statutory guaranteed monthly income must remain in the account after the monthly instalment of the loan has been paid. This only applies to those without children. The required balance is higher for those who support a family member (the amount of cash social assistance if the child is entitled to it).

If, for example, 674 euros had to remain in the account in 2019, 817 euros last year, and after the increase of the minimum wage, around 930 euros will have to remain in the account. And because of this, more than 250,000 pensioners will not be creditworthy, but also many families where both spouses receive an average salary. According to the portal Žurnal24, a family with three children, in which the parents have an average salary of 1,300 euros net, will become credit unfit, in a family with two children, the father and mother will be able to take out a maximum of 20,000 euros credit with a repayment period of 30 years, and in a family with one child a maximum of 100,000 euros. In short, the average Slovenian family with an average salary will no longer be able to afford to buy a home. Not because they could not, but because of excessive regulation and unreasonable increases in the minimum wage.

The problematic minimum wage

The minimum wage is problematic in general. In addition to the fact that Slovenia has one of the highest tax burdens on labour in the European Union and the fact that the salary is something that should be agreed upon by the employee and the employer without any interference from the state, there are companies with low added value that are forced by legislation to pay higher and higher minimum wages and are sooner or later eliminated from the market (become uncompetitive). The only effect of government-set income is that it destroys jobs. Large and capital-strong companies naturally defend the minimum wage, because they know that in this way, they can get rid of less competition that could threaten their position on the market.

The economics professor Antony Davies from Duquesne Catholic University in Pittsburgh, USA, explained what impact the minimum wage has on the worker and the owner. This was also warned years ago by the government’s Office for Macroeconomic Analysis (Umar), which found that the record increase in the minimum wage during the time of Borut Pahor’s government (in 2010) had negative effects: 7,000 people lost their jobs as a result, and in the long term at least 18,000. In addition to the fact that the competitiveness of the economy has deteriorated. But unfortunately, you cannot convince leftists of the harmfulness of the minimum wage. Time will tell how many people will lose their jobs after this minimum wage increase. Therefore, in this year, when we will have a record minimum wage, God have mercy on Slovenia.

Jože Biščak

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