Poverty Among Minimum Wage Workers in Croatia

1. POVERTY AMONG MINIMUM WAGE WORKERS IN CROATIADanijel NestićInstitute of Economics, Zagreb Experts’ Workshop “Extending InGRID integrated datasets and tools on vulnerable groups with employment conditions data” Athens, 28-29 March 2019

2. Introduction • In literature, minimum wage effects on poverty are found ambiguous • Minimum wage hike is expected to lead to an increased wage compression at the bottom of the wage distribution and therefore reduce poverty • However, it may result in lower employment and more frequent informal work arrangements with negative effects living standards of low-paid workers and particularly of those excluded from the labour market • Empirical evidence signals that minimum wages tend to reduce poverty, but the effect is either small or insignificant or of limited empirical validity, as shown by Dube (2013) in a review of 12 studies for which it was possible to extract elasticity of poverty rate on the minimum wage • The effect is possible to depend on the national context, including demographic factors such as age, sex, education and household composition of minimum wage earners • This paper * describes the key socio-economic characteristics of minimum wage workers in Croatia, investigates their material position, and presents the results of a simulation of a minimum wage increase on poverty and inequality • *Nestić D. and S. Blažević Burić, 2018, „Radnici na minimalnoj plaći i siromaštvo u Hrvatskoj” (Minimum wage workers and poverty in Croatia)

3. Minimum wage in Croatia (1) • MW is defined as the lowest monthly gross wage paid for a full time job • MW for part-time job is set in proportion of full time (hours worked/full time) • Work at night and on Sundays, holidays and other non-working days should be paid above the minimum wage, just as overtime work • Covers all workers employed in Croatia regardless of age and type of contract • Collective agreements are allowed to set wages at level lower than the minimum wage (min. 95% of the national MW) • Regular annual assessment of the minimum wage level • MW level for the following year is set by Government decree based on the proposal of the Minister in charge for labour affairs and after consultation with social partners “bearing in mind the increase of the minimum-to- average wage ratio” and taking into account „inflation and wage developments, employment and unemployment trends, demographic developments and the overall state of the economy” • MW cannot be set at level lower than in the previous year

4. Minimum wagein Croatia (2) Figure 1: Growth in the average and the minimum wage (in %, in real terms) • MW in 2018 is 3,440 HRK in gross terms (c. 465 EUR) • Two episides of minimum wage hikes well above the average wage increases (in 2008 and 2013) • What are the effects on the coverage of minimum wage? • What are the effects on poverty among MW workers? Notes: Based on the minimum wage as of July each year. Source: Authors’ calculations based on the CBS data on the average wage.

5. Data issues • Data issues - in the public domain, there is no precise data on wage distribution based on registers (tax authorities have the data, but not ready to share them with the research community, no matched employer-employee datasets in Croatia), we have to rely on surveysto study the profile of MW workers • Labour Force Survey (LFS) – it contains information on after-tax wages on the main job • Up to 2014, information on wages are collected by open question, since then it refers to wage brackets, which is not appropriate for identification of minimum wage earners; the issue of rounded monthly wage levels remains • Valuable source for looking at MW coverage, but not for analysing poverty • Survey on Income and Living Conditions (SILC) gives us detailed information on individual- and household-level income and enables study of material position of MW workers • In Croatia, first SILC is conducted in 2010, with the income data covering 2009 • We have focused on the effects of 2013 MW hike on poverty among minimum wage workers and took the micro data from the 2013-2015 SILC

6. Minimum wage incidence Table 1: Minimum wage workers in % of total employment • Increase in minimum wage in 2008 lead to higher proportion of MW workers; lower effect of 2013 hike • There is substantially higher proportion of MW workers in the private sector than in the public sector • Highest incidence of minimum wages is found in manufacturing, retail and wholesale trades, construction, accommodation and food preparation, and service activities Source: Authors’ calculations based on the LFS microdata.

7. Composition of MW workers Table 2: Characteristics of minimum wage workers Source: Authors’ calculations based on the LFS microdata.

8. Poverty among MW workers Table 3: At-risk-of-poverty rates in Croatia by employment and wage status Note: Minimum wage workers are full-time employees aged 18+ and earining up to 105% of the statutory minimum wage. Source: Authors’ calculations based on the 2013-2015 EU-SILC microdata.

9. MW workers by income quintile Table 4:Minimum wage workers by income quintile, 2014 Notes: Income quintiles were determined by the equivalent disposable income of the household, the lowest quintile comprises of the 20% of the poorest individuals. full-time workers over 18 receiving a monthly salary lower than the 105% of the legal minimum wage. Source:Authors’ calculations based of the 2015 EU-SILC. • Around a half of minimum wage workers lives in households from the bottom two quintiles • More than 20% of minimum wage workers come from the top two quintiles

10. Simulation of 10% MW increase • Assumptions applied on 2015 EU-SILC microdata for Croatia: • Increase in statutory minimum wage by 10% • Employees with wages employees whose wages were below the previous minimum wage had their wages increased by 10% • Employees with wages between the previous and new minimum wage level had their wages increased to new minimum wage level • Employees with wage above new minimum wage level remain to earh the same • Minimum wage workers are employees with wages below the 105% of new minimum wage level • Other incomes remain unchanged • Employment remain unchanged • With the assumptions above, new disposable income and new at-risk-of-poverty threshold is calculated • Poverty calculations were also made with old at-risk-of-poverty threshold (at-risk-of-poverty threshold fixed at the 2014 level)

11. Simulation results(one-off minimum wage increase of 10%) Table 6: Effects of simulated one-off minimum wage growth of 10% on poverty and inequality Source:Authors’ calculations based of the 2015 EU-SILC.

12. Conclusions • Increase in minimum wage in 2008 in Croatia (in the eve of the Great Recession) lead to higher proportion of MW workers; lower effect of 2013 minimum wage hike • Simulation results for a minimum wage increase of 10% indicate its limited effects on poverty and income inequality • In practical sense, minimum wage policy is not the best anti-poverty policy, there are other more efficient policies for fighting poverty, and even for reducing in-work poverty (in-work benefits, tax policy)