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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.

Increasing the minimum wageas economic stimulusand employment in AlbaniaMay, 2014by Eduart GjokutajABSTRACTIncreasing the minimum wage as economic stimulus and employment in AlbaniaRaising 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 increa...Keywords: minimum wage increase, Albania, economic stimulus, employment,JEL Codes: J31, J38, J58Eduart GJOKUTAJAL-Tax CenterHim Kolli, P.48, apt.21Tirana, AlbaniaIntroductionThe 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 ...IWhen 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 230-25...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 ov...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...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.IIPositive 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 th...IIIBut, 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 ...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...IVBut, 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 s...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 mi...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 f...VExperience 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, entre...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 tho...