EKIP– Expert Club for Economics and Politics A Different Opinion
Yesterday, the Minister of Labor and Social Policy Biser Petkov announced that the minimum social security income (MSI) for 2018 will be raised by 3.9%. Once again, such an increase in social security thresholds is being undertaken with the explicit DISapproval of employers and even their refusal to participate in the negotiations for setting these thresholds. And despite the fact that these social security thresholds actually harm workers instead of helping them, as claimed in the rhetoric of trade unionists.
First, don't let the words confuse you. Raising the minimum social security income does not mean any increase in your income. Quite the opposite. Such administrative increases in social security lead to higher labor costs, from which workers, however, gain absolutely nothing. Because raising the minimum social security income leads to spending more money on social security, not on net wages. The second is the income that workers take home, and the first is the money that bureaucrats and politicians steal from them.
How the rise of the MOD is destroying jobs
As with most artificial increases in the cost of labor, those who suffer the most from the existence of the MOD are low-paid workers. First, on the one hand, many businesses, especially small and medium-sized ones, do not have the capacity to bear the payment of a higher social security burden. The marginal enterprises in the market, those that operate with a low margin and are most at risk of bankruptcy, may simply go bankrupt as a result of its increase. Which means less production of the relevant goods and services, higher prices for consumers, and, of course, job losses.
Other businesses will survive, but they will have to lay off some of their workers in order to minimize their costs and not start accumulating losses. This is especially true for those businesses that 1) have low profit margins and/or 2) operate in labor-intensive industries and therefore have a high labor-to-capital ratio. These types of businesses are particularly sensitive to increases in labor costs and suffer the most from increases in social security thresholds. Examples of such sectors are construction, agriculture, and mining.
Those businesses that are labor-intensive will have to reduce their activities - current or planned ones. Which means job losses - both current ones and the corresponding dismissal of previously employed workers, or those that would have been created if there were no artificial increase in the cost of labor.
But the loss of jobs does not exhaust the negative effects of raising the insurance thresholds. Where this measure will not lead to job cuts, it will lead to a reduction in net income. Every worker will have to suffer a reduction in their net salary or at least say goodbye to a potential increase, because it will be eaten up by the employer's higher insurance costs.
Insurance thresholds and labor costs
In Bulgaria, it is often said that employers did not want to pay high wages, but the constant growth in labor costs categorically refutes this. According to NSI data, for the period 2009-2015, labor costs in the private sector in Bulgaria increased by 63.7%, with an average pace of 7.3% per year. When it comes to the pace of growth in labor costs, we are leaders in the EU. For the last 24 months from the second quarter of 2015 to the second of 2017, labor costs in our country increased by 19.5%. Only in Romania did they increase by more.
Source: NSI
Of course, a large part of labor costs go not to pay workers, but to pay taxes and social security contributions. Which are growing steadily with each passing year, despite the protests of employers and their demands that the minimum social security thresholds be abolished.
We must never forget that while workers see only their net income, for employers the gross cost of labor is formed by a set of elements that include not only the net salary. A large such element is the insurance, which in Bulgaria is constantly growing. And the higher the insurance burden, the higher the employers' costs for insurance, and accordingly the less money can be given to increase the net remuneration of workers.
Which is better for workers?
If your salary is not growing as fast as you would like, it is a good idea to think about the role of the state and the tax and social security burden that it adds to the cost of your labor. The worst thing is that the regular increase in social security contributions is presented as a measure in the interest of workers. But if we ask all workers in Bulgaria whether they would like to pay higher social security contributions or have this money added to their net pay instead, I think it is clear to all of us which option they would choose.
I would certainly prefer the latter. At the very least, it gives me more control over my own money. Or at least over the money that should be my property. Either way, are these expenses that the employer pays for ME? This is the price of MY labor. Accordingly, it is appropriate that all of this price be paid to me, and not part of it be seized by the state. And from then on, I can decide for myself whether to pay more for insurance and other similar contributions for social services and benefits. The important thing is that the labor costs go to the workers, and not to some bureaucrats and politicians who parasitize their labor.
A main argument of the unions, which constantly lobby for higher insurance thresholds, is that without them all workers would be insured at the minimum wage. The implication here is clearly that this is something very bad for workers. But why? If workers are insured at a lower income, they will be able to collect a larger part of their gross salary for themselves. Why is it worse for workers to take more money and the state to take less? Why are unions against this? Aren't they supposed to protect the interests of workers, not politicians and bureaucrats?
Ultimately
Bulgaria is the only EU member state in which there is a threshold such as the minimum social security income, which is administratively increased every year. And despite the rhetoric that these thresholds are in the interest of workers and almost protect them from malicious employers, the reality is actually completely different. The only beneficiary of the minimum social security thresholds and their continuous increase is the treasury, or in other words - politicians and bureaucrats. And what workers get are fewer jobs and lower wages.
