Minimum wage rises could add 2.5pp to private sector wage growth, says MNB

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The National Bank of Hungary (MNB) expects the spillover effect of a recent agreement on increases in the minimum wage for skilled and unskilled workers to raise private sector wage growth by 2.5 percentage points next year, Hungarian news agency MTI reported.

The MNB raised its projection for average gross wage growth in the private sector next year to 8.5% in its quarterly Inflation Report released today from 6% in the previous report published in September.

The MNB calculated that the increases in the minimum wage for unskilled workers, by 15% next year and 8% in 2018, would affect 12% of full-time employees next year. It projected the increases in the minimum wage for skilled workers, by 25% next year and 12% in 2018, would impact 16% of full-time employees in 2017. It said that wage distribution shifts to the right in lower wage categories, but noted that the spillover effect typically declines in higher wage categories, which are mainly influenced by labor market supply. After the last sizable minimum wage increase in 2012, “no considerable spillover was observed in wage categories close to the average wage”, the MNB added.

The central bank said a reduction in payroll tax would balance out the impact of the minimum wage increases on labor costs at the macroeconomic level, but it conceded that the distribution of the burden of the increases across the domestic corporate sphere would be “uneven”. Companies that see considerable increases in wage costs may adjust by increasing productivity or by passing on the costs through prices hikes, the MNB said, adding that its analysts “do not expect considerable adjustment” in headcount, based on international empirical literature on minimum wage increases.

The MNB noted that the correlation between wages and inflation weakened after the global financial crisis and counted this as a factor working against stronger cost-side inflationary effects. The national bank believes that higher wages could raise the disposable income of households “significantly” and boost consumption expenditures.

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