Romania will adopt the European minimum wage. Different low income growth scenarios

In the course of 2024, Romania will have to implement in national legislation the European Directive 2022/2041 on adequate minimum wages in the European Union. Although this will bring an increase to low incomes, this does not mean that a minimum wage will be established at the same level for the whole Union. Moreover, the Bucharest government will have a choice between several growth options.

A PSD press release published on Tuesday announces that the European minimum wage will be implemented in Romania by the end of this year, through a draft law that will be developed under the coordination of the Minister of Labor, Simona Bucura-Oprescu. “The increase in the minimum wage to 3,700 lei, announced by Prime Minister Marcel Ciolacu for July 1, 2024, will raise wage incomes to the appropriate level for the introduction of the automatic wage increase mechanism, according to the provisions of the European Directive“, the statement says.

The shopping cart, a vague indicator

But the European minimum wage or the “adequate” minimum wage, according to the expression used in the directive, represents more than the 400 lei increase expected by the Government. The directive obliges Member States that have an automatic or semi-automatic indexing mechanism to update the procedures for updating the minimum wage every four years. In the case of those who do not have this mechanism – as in the case of Romania – the legal minimum wage will have to be updated at least once every two years.

It is essential that the European minimum wage will not be at the same level in all member states, its level being considered fair or adequate depending on the wage earnings of the entire population in a specific country or the establishment of a basket of goods and services at real prices established at national level to ensure a decent living. “In addition to material necessities such as food, clothing and housing, the need to participate in cultural, educational and social activities could also be considered“, the directive states.

This is the so-called minimum consumption basket for a decent living. The problem is that this basket can be set in many ways so there can be considerable variation. For example, in October 2023 the Friedrich Ebert Foundation set the value of this basket for a family consisting of spouses and two children at 9,978 lei, and for a single person at 3,807 lei, above the level of 3,700 lei expected by the Ciolacu government. The money would be needed for survival needs such as food and shelter, nutrition plus current needs such as clothing, personal hygiene, education, health care, transportation, communications, recreation and any unforeseen expenses. It should be noted that the level of 3,807 lei is a net income, while the minimum of 3,700 gross would represent only 2,300 lei.

Three different ways of calculation

In addition to referring to a minimum basket that leaves room for a multitude of calculation methods, the directive leaves the possibility of clearer criteria for establishing an adequate minimum wage. “That assessment could be based on benchmarks commonly used internationally, such as the ratio of the gross minimum wage to 60% of the gross median wage and the ratio of the gross minimum wage to 50% of the gross median wage, which in currently not met by all Member States, or the ratio between the minimum net salary and 50% or 60% of the average net salary“, the directive provides.

Unlike the gross average wage which is the arithmetic average of all wages, the median wage is the wage level that divides the number of employees into two equal halves, one with incomes below the median wage, the other above. There are no updated official statistics for the median wage, but setting the minimum wage at 60% of the median wage could lead in Romania to the paradoxical effect that the minimum wage should be reduced. This is because, anyway, in Romania, about 1.5 million employees are paid at the minimum wage level, which also makes the median wage very low.

It seems that the PSD expects to resort to the option in which the minimum gross salary would be set at 50% of the average gross salary. Thus, the level of the average gross salary used to base the state social insurance budget for 2024 was set at 7,567 lei, which would make the minimum gross salary 3,783 lei, very slightly above the level expected by the Executive.

The variant with the minimum salary of 3,000 lei net

Finally, the directive also leaves room for the appropriate minimum salary to be established according to the net salary, not the gross one, which would be the best option for employees in Romania. Thus, the minimum should be set at 50% – 60% of the average net salary. According to the data published by the National Institute of Statistics, in January 2024 the average net salary in Romania was 4,859 lei, which means that the minimum net salary should reach 2,429 lei, if the 50% option is preferred, or even 2,914 lei, in the 60% version. To reach these targets, the gross should be 4,084 lei (50% scenario) or even 4,964 lei (60% scenario).

But such a spectacular increase would put Romanian employers in difficulty as a minimum net salary of almost 3,000 lei means substantial insurance contributions due to the policy of the Romanian state, which imposes a high taxation of the labor force, over 40 %, the highest in the European Union. Minimum wage taxation is only 6% in Spain, and in Belgium, Estonia, France, Ireland, Malta and the Netherlands it does not exceed 10%. Only Hungary comes close to the level of Romania, in the neighboring country an employee with the minimum wage receives only 66% of the gross.

Also in the text of the directive it is said that variations and deductions for the minimum wage should not be widely used because “risks having a negative impact on the adequacy of minimum wages“. In Romania, the minimum wage is higher in the construction sector and in agriculture, but in the future this could change, if the provisions of the directive will be strictly applied.