Higher social security contributions – less employment

Although the BSP has not been in power for some time, the party spirit and the "social" sentiments continue to hover in the corridors of power. Another proof of this is the actions of the acting Minister of Social Affairs, Yordan Hristoskov. A few weeks ago, he warned that if the unions and employers do not agree on an increase in the insurance thresholds, they will be increased administratively. That is exactly what happened at the beginning of this week - in many industries there will be an administrative increase of 4.2% from January 1, 2015.

According to data from the newspaper Kapital, the administrative increase in the minimum insurance thresholds will affect about 2 million people. In fact, almost all workers on an employment contract will be affected by the increase in insurance (administrative + negotiated) because only in 4 sectors will insurance remain at the same level. Thus, in an attempt to fill the budget deficit in the state social insurance system, the minister and the unions will affect the entire structure of production through higher mandatory rates.

Minister Hristoskov himself motivated his actions with the controversial arguments that: "Practice has shown that neither employment decreases from the increase in the minimum insurance thresholds and the minimum wage, nor does unemployment increase. If all these calculations came true, unemployment should now be 50%. " Let's see if economic analysis will lead us to similar reasoning.

As economics has long shown, from the perspective of employers, labor is a resource. But it is not the only production resource and can be replaced by capital goods (equipment, machinery, etc.). Entrepreneurs choose to hire workers because their relative price is lower compared to machinery. When the administration artificially increases the price of labor, without an increase in its productivity, it becomes more expensive, becomes unprofitable and, therefore, is released. There is no economic logic in the minister's statement that by artificially increasing the price of a resource, its use for production activity will not decrease. Quite the opposite: a higher price, other factors remaining unchanged, will lead to less use of labor; i.e. to higher unemployment.

There is a reason why employers and entrepreneurs have chosen to allocate their scarce investment resources in such a way as to hire low-skilled employees. It is that this is how their enterprises are most productive and profitable. When the price of any of their production resources is administratively increased, another negative effect is visible (in addition to the jump in unemployment), namely - the reduction in the competitiveness of individual companies and the economy as a whole. Lower competitiveness means, other things being equal, a reduction in production and, respectively, lower economic growth.

We should also note the “invisible” part of the effects. As is clear, labor is not evenly distributed territorially and in relation to the salary it receives. The consequences of the administrative increase (and of any increase in general) of the minimum administrative thresholds will not affect IT engineers in Sofia, but low-skilled general workers in the province (who make up a large part of the employed in some regions), for example, who are insured at the minimum thresholds. That is, they will hit precisely where the damage will be greatest; namely the workers who will have the most difficulty finding work because they do not have the necessary experience and/or education and who live in regions or settlements where business is weak.

However, we must ask ourselves: “If it is true that the administrative increase in social security contributions will not negatively affect employment, as the minister claims, then why stop at an increase of only 4.2%? Why shouldn’t employers’ contributions be increased by 100% or even 200%?” It is clear that if someone expects only positive things from their activities, they are unlikely to stop at just the minimum of their performance. In fact, Minister Hristoskov’s actions clearly show that he – at least intuitively – is aware of this. Moreover, Minister Hristoskov claims that there is “deliberate non-negotiation” and “freezing of thresholds over the last 2-3 years,” and this could “discredit the bargaining system.” In fact, it is exactly the opposite – the forced intervention of the state is what discredits free bargaining between employers and workers.

Insurance should not simply not be increased. It should not exist in its current form at all – in the form of mandatory payments regulated by the state and subject to the wishes of the unions. Higher insurance payments will lead to forced unemployment of the most inexperienced and low-skilled people living in the poorest regions; what is more – they will reduce the competitiveness of business and slow down economic growth. It is unlikely that in time, when some subsequent government starts looking for funds to pay “unemployment benefits” to these people, someone will remember that the fundamental reason they are unemployed in the first place is precisely the harmful action of the state for the economy.

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