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Increasing the minimum wage

as economic stimulus
and employment in Albania


May, 2014









by Eduart Gjokutaj





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ABSTRACT

Increasing the minimum wage as economic stimulus and employment in
Albania

Raising the minimum wage has a positive effect on businesses, as it increases demand
for goods and services, promotes and encourages employees to work harder, but also
tends reducing cost, as it creates job stability of workers, investing so to increase their
capacity. In terms of our country, when the largest number of employees is in services
and manufacturing industry, of course we need to analyze the model with a view to
promoting a policy debate in favor of multi-dimensional growth. Economic development
can not only encouraged through fiscal easing measures and removal of some barriers,
such as those approved last month the government.



Keywords: minimum wage increase, Albania, economic stimulus, employment,
JEL Codes: J31, J38, J58


Eduart GJOKUTAJ
AL-Tax Center
Him Kolli, P.48, apt.21
Tirana, Albania



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Introduction

The minimum wage for a work of 174 hours per month in 2014 cost 0.9 euros / hour in
Albania. While the value of one hour of work per month for all employees in the taxable
wage limit is 1.2 Euro / hour.Even though some of them (about 35 percent) work as
secondary job in part time, the extra income they earn cover in many cases the
impossibility of other family members to work.

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When we compute the effect on the micro level by the application of progressive tax on
salaries for 30% (120 thousands) of all employees, anyone of them can tight in their
pocket the effect of up to 22 euros / month (reference level salaries of 230-250 euros /
month). From this additional of 12 cents per hour, the increase is 11 percent. Employees
in Albania have this income in their hands, since the beginning of this year.

Also, other salary categories benefits in small additional portion an increase in their
salaries from the beginning of the year, and all the employees benefiting from
progressive taxation scheme (420 thousands), were added together in their pockets
over 10 million euros for this year. The government budget of fiscal year 2014 gave up
from the revenues for this category, and on the other hand this policy it can be
considered as a form of subsidy for consumption increase. Yes, we could call it so!

When we calculate in macro level, is a fact that the increase to 11 percent for low
salaries and up to 4% in salaries of secondary level (limit 6,100 Euros to 8,600 Euros /
year), it can be concluded that it has begun to affect in improvement of basic living
standards .

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In a big extent, the tendency shows the monthly increase in consumption if we examine
the statistics of the first trimester of 2014 as regard to consumer indexes, imports and
purchasing power compared with the same period of two years ago.
However, this partial progress should be monitored continuously and must be analyzed
closely linked to economic growth.

II
Positive fiscal policy has encouraged domestic consumption and demand in the market
by activating channels of income redistribution to citizens through (a broader tax base
consumer tool, but with a redistribution policy reinforced with (b) increase the flow of
money to businesses and individuals at levels of 145 million euros. Thirst of economy
is fading from month to month. The reason is that finance authorities are working to
combat the 'drought' of debts to banks and the debts of businesses from each other,
deconcentration of liquidity and capital in few suspicious oligarchic hands and
expanding of base of labor market. In addition to these measures, the government has
called on the stage, a strong policy of fiscal management, where on one hand aims to
broaden the base of VAT in unusual levels of its history. Let's not forget that the VAT
refund needs fresh money. On the other hand aims to limit the size of tax evasion, to
consolidate the foundations of the new fiscal policy of the fair taxation.

III
But, what is the link between the minimum salary increase with economic growth?
What is the trick?

The category of workers with low salary are also customers who spend up to the last
penny of their monthly income by so increasing the consumption in the country, taking
into consideration the wide base they represent. The monthly consumption reaches the
level of 140 million euros (about 10% of purchasing power in the country). In this logic, if
the minimum wage increases, then the flow of economic activities and consequently
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imports and exports will grow more, serving in the short-term future as a premise for
new jobs.

On the other hand, research has shown that the claim that increasing the minimum
wage policy could hurt employment growth, because small businesses can not afford
the increased cost has no basis. Experience from countries with high unemployment, as
is analysed by the economy scholars shows that there is evidence indicating that no
adverse effects on employment growth. Raising the minimum wage has a positive effect
on businesses, as it increases demand for goods and services, promotes and encourages
employees to work harder, but also tends reducing cost, as it creates job stability of
workers, investing so to increase their capacity. In terms of our country, when the
largest number of employees is in services and manufacturing industry, of course we
need to analyze the model with a view to promoting a policy debate in favor of multi-
dimensional growth. Economic development can not only encouraged through fiscal
easing measures and removal of some barriers, such as those approved last month the
government.

IV
But, can you have more arguments and response than until now about the need of
raising the minimum wage?

I think so.

For the past 10 years the minimum wage has increased by 110 percent and in the last
five years has increased by 29 percent. From the studies of last years in last decade
when there was an increase in the minimum wage, it seems that this policy was a strong
base for sustainability of economic growth. In the case of a weak economy is to increase
the minimum wage, and as result makes good to economy.
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Promote greater for increasing the minimum wage aims to improve social inequality
increased in the last 5 years. A minimum wage increase will demonstrate its role as a
standard of work on the protection of workers and giving them assurance, since a
minimum wage increase affects the level of poverty in the short term.

But the negative reaction to the proposal to increase the minimum wage, arguing that
increase will bring additional financial problems for entrepreneurs, and can affect job
cuts is not new for this argument. Experience shows that it is only an inner fear rather
than the economic reality that has passed the U.S., EU, Japan and Australia. Even in
Albania, the minimum wage increase year after year has not increased the number of
unemployed, although in recent years unemployment rose drastically (otherwise from
official stats) as result of bad policy response to the economic crisis.

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Experience expressed in studies done on this subject shows that entrepreneurs do not
react automatically when the minimum wage is increased and reacting by cutting jobs or
closing new recruitment process. In a moment of raising the minimum wage,
entrepreneurs are forced to be organized and structured in response to market
competition and making necessary adjustments within the activity to proceed ahead. Of
course, the service activities are slightly more affected by the minimum wage increase,
but if the market is fully formalized, the challenge remains the same for everyone.

The minimum wage is still a debate in the hidden stages within the discussion of model
of wage taxation. Actually it is not yet turned into a battleground for politics, but for the
moment has a strong opponent that are export activities and mainly those activities that
use exactly the cost of labor as profit, ie the category that is less profitable by increasing
the minimum wage.