Whenever the topic of increasing the Czech minimum wage is raised, it always evokes strong emotions. Year after year, certain politicians and employer associations come up with catastrophic scenarios according to which an increase in the minimum wage by only a few per cent could significantly endanger not only the condition of the Czech economy, but also jobs of low-skilled workers.

The idea of increasing the minimum wage is described as boundless populism, a marketing trick or absurdity. Arguments supporting such pessimistic statements are usually repeated by certain politicians and economists. The increased costs of employment associated with a higher minimum wage are said to lead to job cuts, reduced competitiveness, or entire companies being shut down and their production being moved abroad.

Are such claims actually based on empirical data? Is the minimum wage solely an economic issue? And how high should the minimum wage then be?

A compromise below the poverty line

As a result of the last passionate public debate, the minimum wage for 2020 was increased to CZK 14,600 (€582) gross for a full-time worker. This results in a net monthly wage of approximately CZK 12,100 (€482) for a single person without children, and CZK 13,400 (€534) for a parent with one child. The Czech government took this decision after a series of failed tripartite negotiations with labour unions and employer associations, calling it a good compromise. Consequently, employer associations commented on the government’s decision calling it dangerous and detached from reality

However, the fact is that a full-time worker who does not receive any social benefits lives below the poverty line. In 2018, the last year for which we have data, the Czech Statistical Office (CZSO) set the poverty line at CZK 11,963 (€477) a month for a one-person household and CZK 15,552 (€620) for a person taking care of a child under 13 years of age. Given the expected wage growth of 7.4 per cent in 2019, it can be estimated that the poverty line, which depends on the median income, has risen to a monthly income of CZK 12,850 (€512) and CZK 16,700 (€666), respectively. Therefore, a person receiving the minimum wage keeps living below the imaginary poverty line.

The poverty line as a dichotomous line between the poor and the rich?

Given the above, it might seem that an increase in the minimum wage with just a few hundred Czech crowns could eradicate poverty among Czech workers. Moreover, as Prime Minister Andrej Babiš did not forget to mention in his New Year’s speech, the Czech Republic has the lowest poverty and social exclusion rates of all EU countries. In 2018, only 3.4 per cent of Czech workers’ income was below the poverty line. Is this a reason to celebrate? And what does it mean to live below the poverty line, statistically speaking?

According to Eurostat’s definition, people are at risk of poverty if their disposable income is less than 60 per cent of the national median of equivalised disposable incomes. The disposable income is all the money one has to spend, meaning one’s income including investments and social benefits, but minus taxes and social security contributions, and excluding savings. However, this definition does not explain what decent living standards look like and when exactly people experience poverty. 

The income with which one is at risk of poverty itself is solely an expertly determined artificial value that helps statisticians compare income stratification across countries. Thus, even if one’s income is higher than the income at-risk-of-poverty, this does not necessarily mean that the household lives in decent living conditions.

For this reason, statisticians work with other indicators as well, including material deprivation rate. Through an extensive sample survey, the CZSO derives data on nine so-called ‘deprivation factors’ such as the ability to pay for an unexpected expense or to afford a one-week annual holiday, which is used to calculate the material deprivation rate. How are Czech households with working members doing?

Statistical poverty is not the same as real struggles

The material deprivation rate shows that Czech families struggle much more often financially than the poverty rate tells us. For example, data for 2018 show that 20 per cent of working households would not be able to afford to pay for an unexpected expense of CZK 10,700 (€427) and 16 per cent did not have enough money to afford a one-week holiday. 41 per cent of working households admitted experiencing substantial difficulties regarding their incomes.

The financial situation is particularly unfavourable for single-income households with children. 31 per cent of them, compared to 20 per cent of the general population, confirmed that they would have trouble paying for an unexpected expense. The survey also pointed to significant differences between Czech regions.

Furthermore, a unique project entitled Divided by Freedom, which studies the state of Czech society thirty years since the Velvet Revolution, revealed that many Czech households find themselves in difficult situations. According to the study, Czech society is divided into six classes, not only in terms of their income and wealth but also in terms of social relations and competences. 17.6 per cent of the country’s population falls into the so-called ‘deprived class’, characterised by very low incomes, wealth and social capital. Another 22.8 per cent falls into the so-called ‘endangered class’ which has a very low income but solid social capital and professional skills. Together, these two groups make up the 39.8 per cent of the population that survives on a low income. 

Both the deprived and endangered class face a high risk of losing their jobs and falling into a debt trap, leaving no doubt about the need to increase income for these risk groups. And one – but not the only – option is to raise the minimum wage.

Room for raising the minimum wage exists

Increasing the minimum wage is often argued to be risky for a country’s economic competitiveness, as it might make companies decide to move their production abroad. However, looking at 2019 purchasing power parity, it turns out that the Czech minimum wage offers the fourth-lowest purchasing power in the EU. In comparison, national minimum wages allow for more goods and services to be purchased in all neighbouring countries as well as in Romania, Hungary or Croatia. 

The Czech minimum wage is also particularly low when compared to the country’s median wage. While on average in the EU the minimum wage compares to 53.5 per cent of the median wage, the 2019 Czech minimum wage added up to just 43 per cent of the country’s median wage, making the country rank second to last on the EU ranking. Taking into account these figures, concerns about Czech competitiveness cannot be justified.

The question is: how much could we increase the minimum wage by and how should its regular valorisation be structured and ensured? While the one thing that trade unions and employer associations can agree on is that there should be a formula that predicts the minimum wage evolution, unfortunately they do not agree on what such a formula should look like.

The Czech-Moravian Confederation of Trade Unions proposed that the minimum wage be set to at least 50 per cent of the average wage. However, the Czech Chamber of Commerce objected that this formula is based on retroactive data and does not take into account the development of the economy. It furthermore recommended linking the formula to the median wage instead of the average wage. However, besides providing criticism, it did not come up with its own proposal. Last year the Chamber of Commerce even campaigned for freezing the minimum wage.

A possible compromise could be to set the minimum wage at 50-55 per cent of the median wage, calculated using the Ministry of Finance’s economic forecasts for the following year. This solution would take into account the figures at the European level and include economic forecasts, effectively taking away concerns about basing the minimum wage on retroactive data.

Let’s imagine this proposal is agreed on. This would mean the 2020 minimum wage would be between CZK 16,596 (€662) and CZK 18,256 (€728) a month, depending on employees’ situation. What still needs to be considered, though, is how to involve employee and employer representations in periodic reviews of the mechanism so that the important dialogue on working conditions with the government can be maintained.

People are not apples…

Another typical argument against raising the minimum wage is the fear of a drastic drop in employment. The classical economic theory, which’s relevance for employment has been refuted by a series of real-world data studies, is based on the assumption that the labour market operates on the same principle as the relationship between supply and demand of goods in an ideal market environment. According to this theory, an increase in the minimum wage leads to a rise in labour costs, which then results in a decreasing demand for labour and thus a drop in employment. However, actual data does not support such simplified ideas.

In 2015, the World Bank published a comprehensive study on employment, focusing among other things on the impact of the minimum wage on the labour market. The report notes that results of previous studies differ widely, with more recent studies showing a neutral or even positive link between minimum wage growth and employment. This paradox can be explained by an increase in purchasing power caused by increased wages.

Last year, another extensive analysis was conducted by the University of California at Berkeley, examining 51 cases of minimum wage growth at local levels in the United States. Its results showed that an increase in minimum wages has a limited or no effect on the reduction of low-skilled jobs. Additionally, the study found that increased minimum wages contribute to reducing child and household poverty.

Some studies also examined the indirect effects of minimum wage increases. For example, the World Bank’s analytical work shows that a 10 percentage point increase in the minimum-median wage ratio leads to a 1.7 to 2 percentage point rise in labour productivity in the long term. Other studies (here and here) indicate a direct link between poverty and ill-health. The strong correlation between socio-economic determinants and health is also stressed in the Czech National Strategy for Health Protection and Promotion and Disease Prevention

The findings of these studies show that wage growth in low-income groups is not only in the interest of employees. Employers themselves can also benefit from it, not to mention the positive effects on public health and social wellbeing.

Living wage to be a remote but desirable goal

Another recent important project is called Dignified Minimum Wage. Its aim is to calculate a minimum living wage which enables workers and their households to live in dignity in terms of their material needs. In 2019, this amounted to CZK 31,463 (€1,255) a month gross, and CZK 36,850 (€1,470) a month for employees in Prague due to higher living costs.

This project is unique because it provides an estimate of the necessary minimum income that could significantly reduce material poverty and its negative impact on human health and social conditions. At present, however, there is a dramatic difference between legal and living wages. Last year, the minimum wage set by Czech law reached only 47 per cent of the living wage. Obviously, the current minimum wage will not be increased to the minimum living wage that the Dignified Minimum Wage project calculated any time soon. 

In addition to the minimum wage, there are other tools to reduce the wage gap. One fairly easy option is to increase the tax deduction for workers, which has not changed since 2008. Among the more complex and long-term options are making structural changes to make housing more affordable or to fundamentally change the tax system, perhaps including unconventional taxes or social assistance systems such as negative tax or a basic unconditional income. 

It is clear that reducing working poverty is a common concern for al Czechs and that solutions exist. Now it is up to the government to act.