Neivelt: give the minimum salary its dues ({{commentsTotal}})

Indrek Neivelt
Indrek Neivelt Source: Photo: Postimees/Scanpix

The debate over the minimum salary has heated up and a lot of interesting things has been said about the topic. We know that many fees, including kindergarten expenses, are tied to the minimum wage. No one is able to explain why should kindergarten fees be pegged to the minimum salary, and why shouldn't local governments decide themselves. But that is how it currently is.

There are many other things tied to the minimum salary. I think Parliament should review the list of things pegged to the minimum salary. Right now it seems that the linkage to various topics is one reason the minimum wage is so low.

The prime minister has reminded us that the government does not decide the minimum salary rate. The rate is agreed upon by the Employers Confederation and the Trade Union Confederation. That is how it is - but is this justified? The Employers Confederation represents a quarter of employers. Six percent of the workforce belongs to unions. So 25 percent of one side and 6 percent of the other side negotiate and agree. The mandate is too weak. The authority of the government is much greater.

I sat on the board of the Employers Confederation for a few years 15 years ago. The minimum salary was even lower then and it is embarrassing to think about it. Back then respectable entrepreneurs sat at the meetings and discussed the topic. I asked them if anyone knew anyone who was paying minimum salaries, and was met with silence. The answer was that some people at the Kreenholm plant (large, now closed textile plant in Narva) might be receiving the minimum wage. Back then there were no serious calculations or reasoning behind the minimum rate, not to mention a vision for increases. I hope these things are there now.

Who needs the minimum wage?

The actual need for a minimum salary is also up for debate. The market determines everything anyway. This sort of liberal approach is theoretically possible.

What about in practice? The state, meaning all of us together, go to great lengths to educate people. Let's say a person graduates from university, “free higher education,” and that person will begin to receive, for example, 500 euros (per month). It is a very low salary in the European Union common market. If a person works for the state we must look into the mirror and ask ourselves why we are unable to pay more. If a person works for the private sector we must admit that we have made a sour investment.

In another words, it is not sensible that we hand people free higher education and then they begin work for low pay or leave the country. The system does not work.

Or let's put it another way. Is the state able to pay for a European-standard free higher education from taxes when half of the population earns less than 750 euros per month?

Medicine is suffering from the same problem. We have a social medical system and it is not possible to keep doctors at work in the European conditions, and maintain modern equipment when most of the patients are paying social tax from a salary lower than 750 euros. Especially when you consider our age demographic structure. The system does not work.

If we abolish the minimum wage we must also give up free higher education and public healthcare. Are we ready for that?

The minimum salary is there to fix the minimal sum a person must pay to receive state benefits. And if we want to keep the same level of education and medicine, we must create more added value. Or to do more complicated tasks in an easier manner. And the minimum wage is one way to push businesses and people up the value ladder.

The Reform Party slogan “In 15 years, [Estonia must be] among the five richest nations” gave a wrong impression that we can become richer by doing the same job in the same way. Taking into consideration rivalry in the world, there is one sure thing that doing the same job the same way is more likely to make you poorer.

Many companies must shut up shop or re-profile. And this can be at times painful. But what are the alternatives?

We need a long-term vision for minimum salary growth

The Development Fund proved already in 2007 that the structure of the economy must change. The paradox is that more jobs have been created in low-salary sectors. If we had had a long-term plan to increase the minimum wage, say for 15 years, which would have been tweaked to the current situation, our economy would probably better off today.

The Reform Party should have drawn up a graph in 2008 to show how the economy should grow to reach the top five richest nations. And the graph for the increase in minimum salaries could have been gathered from that. We should have passed the Spaniards by now and been on par with Italians. Sadly I can not elaborate, as a graph on how to reach the top five was not published at the time. One thing is certain: if we want to be among the five richest nations in seven years, the minimum salary must be 1,000 euros already now.

To sum it up, I propose to unpeg the minimum wage from various budget lines and give it its real content. A graph for the increase of the minimum salary must be available for at least five years into the future, and that graph must be upgraded every two years to mirror the realistic situation. And the responsibility for that figure must belong to the government.

The minimum salary is one of the few instruments the government can use to direct the economy. The head of government should not be a mere statistician here.


Indrek Neivelt is a former CEO of Hansapank and current supervisory board chairman of Bank Saint Petersburg, who often speaks out on matters concerning the economy and the tax system. Last year he proposed measures to reform the tax system. Read the story here.

Editor: J.M. Laats