National Bank of Ukraine reacts to government's decision to raise minumum wage
Starting on January 1st, the minimum wage in Ukraine has doubled to 3,200 hryvnias ($118). On February 3rd the National Bank of Ukraine (NBU) in its inflationary report predicted that this could lead to a decrease in employment, particularly in small and medium-sized business. According to the NBU's estimates, around 630,000 Ukrainians (or 5.4% of employees) could be left without a job. Thus, the unemployment rate will amount to about 10% according to the methodology of the International Labor Organization. At the same time, the NBU believes that the decline in formal employment is partially offset by informal or unofficial employment.
Later, the head of the National Bank, Valeriya Hontareva, explained that there is no direct relation between the increase in the minimum wage and the increase in unemployment. Moreover, it is incorrect to consider such a connection. According to Hontareva, the number of unemployed will increase on account of "dormant" individual persons-entrepreneurs, who will close their businesses.
Earlier, on January 1st, 2017, the individual payers of the single tax of the first group, had to pay a single social contribution (740 hryvnia or $27 — which is also calculated from the minimum wage), even at times when they do not conduct business activities and have no profits. Also, since January 1st, the fine in the framework of the administrative responsibility for the payment of unofficial wages has increased. The fine now amounts to 100 times the minimum wage (320 thousand hryvnia or 11 thousand 781 dollars). These reasons have led to the mass decrease in the number of the so-called “dormant” individual tax payers. In just a month, from mid-December 2016 to mid-January 2017, nearly 185,000 businesses (out of nearly 2 million registered at the beginning of December 2016) closed in Ukraine.
According to market experts, some of them became employees, some began to work illegally and some left the country.
The head of the NBU sees many advantages in the increase of the minimum wage.
"It will stimulate the growth of the domestic demand and economic activity, and hence — the demand for labor will increase. And all this will increase employment in the future," Hontareva commented.
The Deputy Chairman of the National Bank of Ukraine, Oleh Churiy, has a more balanced view concerning the issue of the increase in wages. Churiy believes that this increase will have both positive and negative effects. The positive one is a GDP growth by 0.5%, while the negative one an inflation increase by 1%.
Due to the increase of the minimum wage, the NBU revised the projected increase in prices for 2017. Inflation will reportedly amount to 9.1% (instead of the 8% which was predicted earlier). And a year later it will be reduced to 6%, as it was expected. In 2016 the inflation was 12.4%.
At the same time, the Minister of Ukraine’s Social Policy, Andriy Reva, stressed that the predictions about the increase in prices and the layoffs due to the increase in the minimum wage are unfounded. He explained the Ministry of Finance and the Ministry of Economic Development and Trade carry out the calculations in the sphere of the employment in collaboration with the Ministry of Social Policy, which in turn, works with scientists. According to Reva, the salary increase will not bring negative consequences to Ukraine’s economy.