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National Economy to Improve, Though Some Jobs may be Axed

Although the reduced contributions employers must pay the government for each of their workers as of this year is expected to have a positive effect on the Hungarian national economy overall, some companies could face problems generating enough income to meet the requirements of the increased minimum wage, and may need to rethink their business models, or even cut jobs. 

Péter Lakatos, vice president of the Confederation of Hungarian Employers and Industrialists (MGYOSZ).

Under a bill the Hungarian Parliament passed mid-December, the ratio of payroll tax was lowered from 27% to 22% as of the beginning of this year, and will further be lowered to 20% as of 2018. The healthcare contribution is being adjusted accordingly. A 9% flat-rate corporate tax was established, replacing the earlier 10% on a tax base up to HUF 500 million, and 19% over that.

Along the lines of the decrease in contributions, representatives of the government, employers and employees signed an agreement on pairing the marked increases in the minimum wage with a drop in contributions. Under the agreement reached by representatives of the three sides, the minimum wage for unskilled workers will rise by 15%, while the wage for skilled workers will climb 25% from next year.

Beneficial for the Economy 

Although the proof of the pudding is in the eating and the exact effects of the aforementioned changes to the Hungarian economy will reveal themselves only as time passes, forecasts suggest that, on average, the national economy should benefit from the transformed environment, even if some jobs might be lost in certain sectors.

“If all the circumstances stay unchanged, no new jobs would be created and some may disappear,” Péter Lakatos, vice president of the Confederation of Hungarian Employers and Industrialists (MGYOSZ), tells the Budapest Business Journal. “However, the economy changes dynamically; the situation needs to be evaluated in a system, and the changes on the whole might improve efficiency, and could make employment more attractive for fostered workers or the unemployed,” he adds.

Therefore, overall, the changes should boost the economy. “The decrease in the contributions is significant as it makes the required increase in the minimum wages easier, as well as improving the overall competitiveness of the national economy,” György Vámos, general secretary of Hungarian Trade Association (OKSZ), tells the BBJ. He argues that while not every worker’s wages will rise, the contributions are cut in every single case, therefore it offers big relief for employers.

Possibly Troublesome for Certain Firms 

It is apparently company and sector dependent whether the ratio of lowered contributions leaves enough room for increased wages. “For an engineering company, the 5% increase is compensated for by the dropped contributions. For a hospitality firm, or a processing company that employs many trained workers, however, the raise could mean a significant additional burden,” Lakatos says. “The regulations are normative, as far as the market is concerned. It is not the size of a company that counts, but efficiency, the rate of automatization and the business model,” he adds.

Furthermore, some of the players of the retail sector might face real hardship in trying to cope with the changed regulatory environment. Vámos says that the retail sector has seen varying wages and burdens on average. He hints that, while increased wages could be easily generated by multinationals, some smaller companies might need to rethink their operations in order to keep up with the requirements. Smaller stores and food retailers especially might decide to opt for more part-time employment and apply shorter opening hours, such as closing for the night or on Sundays in some cases.

However, Vámos expects the retail market to grow by 4-5%. He says the drop in the contributions has “huge significance”, and could slightly contribute to the creation of more

jobs and to a lesser extent could decrease the tensions of labor shortage. The true effects of the changed environment will be seen only in the first half of the year.

Partly Whitening the Economy 

Vámos and Lakatos further add that the economy could also be slightly whitened in the new environment. “Basically, [changes] point toward the way [of whitening the economy], only its extent is questionable.” Lakatos elaborates. “However, we cannot expect the same amount of whitening as from the e-tills. At the same time, it must be noted that the danger is real that some companies will try to circumvent the regulations; as such companies who cannot keep up with the competition, might not choose to close doors, but could decide to enter a grayer or blacker mode,” Lakatos says.