Classical Liberalism 101: Raising the Minimum Wage in the EU -- Bulgaria, A Case Study

Whether or not raising the minimum wage is more likely to help the poor or harm them has been a hot topic of debate between the left and the right sides of the political discourse for scores of years now. It comes as no surprise to anyone that bureaucrats would spend millions trying to prove that social programs do fill more than their own stuffed pockets. What may be surprising to some, however, is that a recent study done by the EU shows, once again, that raising the minimum wage has two glaringly obvious side-effects: it leads to higher unemployment and higher prices. It's funny, that old saying about "The road to hell is paved ... " Well, you get the idea.

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ECB: Raising Minimum Wages Leads to Redundancies (Layoffs) and Higher Prices

by Stefcho Stefanov

Research by the European Central Bank studying more than 8079 companies from Central and Eastern Europe (CEE) EU member states is aiming to shed light on how raising the minimum wage (MW) affects businesses in those countries.

456 Bulgarian companies were asked what steps they took following a government (federal) increase in MW. The survey, in its Bulgarian version, contains 5 elements which can be used as measures when such an increase is implemented:

1. Number of Employees;

2. Price of Goods/Services Offered;

3. Other Expenses;

4. Flexible Salary Components (bonuses and benefits); and

5. Productivity.

The businesses responded as follows:

Actions taken: Companies with employees on MW; Companies without employees on MW

1. Decreasing the number of employees: 25.2%; 13.9%

2. Increasing the price of goods or services: 35%; 41.3%

3. Decreasing other expenses : 8.1%; 5.6%

4. Increasing other employees’ salary: 29.2%; 50.6%

5. Seeing an increase in productivity: 21.5%; 35.8%

The results undoubtedly show that increasing MW leads both to higher unemployment and higher prices of goods and services. We have written more than once about the negative effects of raising the MW, which hurt mainly those very employees who are intended to be shielded by the mechanism. The ECB study supports this fact.

In comparison with the other 8 countries from CEE, the chances of Bulgarian firms laying off workers is the greatest. Increases in MW in Bulgaria can have even greater implications than in the other CEE countries or in the developed Western economies, due to two extra factors:

1. The number of workers on MW is considerably larger (21% in Bulgaria, while below 10% in Western Europe); and

2. The age of employees on MW is higher (30% of people on MW are above 50 in Bulgaria, while they are at least half that number in Western Europe).

The following conclusions can be drawn here:

1. Bulgaria’s economy is heavily influenced by the negative effects that raising MW has on business — it primarily means more expensive goods and services accompanied by increased unemployment;

2. More expensive goods and services equal higher, unforeseen inflation, as well as lower profit margins;

3. The grey sector grows;

4. Tax revenues decrease;

5. It becomes harder for older people to retrain and/or find a job once they are laid off;

6. Working conditions worsen due to employer spending cuts;

7. Consumption decreases; and

8. Cost of living rises artificially.

In connection, let us not forget the most recent analysis of the European Commission of the Bulgarian national economy via the European Semester Program, according to which the grey sector is harming tax collection and the job market. Practices such as raising the MW feed the grey sector, forcing some businesses into it that do not want to lose employees.

It is important to note that this study in Bulgaria was carried out in 2014 and the businesses responded based on information available for 2010–2013, during which time the MW jumped by 23%. Since then, it has increased from 310 to 510 BGN (i.e., 64.5% — or double the previous increase). This trend could spell even more pronounced negative effects in the future.

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Translated by @peter.tsukev, edited by yours truly. Emphases added by moi. Originally published at https://ekipbg.com/ecb-minimum-wage/