By Robert Chovanculiak, courtesy of INESS
Regional differences are not something that can be easily removed. Especially in Slovakia, which has not experienced proper urbanization and has residents scattered in 3,000 villages throughout the country, with their mobility limited by local ownership of property.
The cautionary example should be the failed convergence between West and East Germany.
Even 30 years after reunification, the former East Germany’s per capita GDP remains just 70% of the West’s. And it had the same institutions and laws, not to mention huge subsidies.
Perhaps the relatively modern concept of special economic zones would help. In the most underdeveloped regions, we can swiftly cut red tape, reduce taxes, and reform basic state services such as law enforcement. This is how many poor areas have become rich in the world.
It is certainly not possible to get rich through an administrative increase in the minimum wage. On the contrary, what the lagging regions actually need is a lower minimum wage so that long-term unemployed people who have no work experience and virtually no education can join the labor market.
However, introducing a regional minimum wage is a political “no go” zone. Instead we can take advantage of a disadvantage — the high tax burden on labor — to achieve similar results. We can leave the same nominal minimum wage all over Slovakia, but reduce its negative impact in the lagging regions through a deductible contribution item. This way, everyone wins.
This is something that employers and employees have been waiting for for years. Over the past five years, the tax burden on the cost of a person’s labor has increased from a minimum of 29% to almost 40%. This increase is due to two phenomena:
- For many years, the non-taxable amount has grown at a much slower pace than the minimum wage. This means that while a person with a minimum wage in 2012 paid no taxes, this year he pays 24 euros a month.
- The second reason is that the deductible item from health contributions was originally defined in fixed terms. This item has been defined as a constant that does not grow over time. And so its proportion also shrank over time, meaning next year a person with a minimum wage will not deduct anything.
In addition, in 2018 the government introduced an extremely counterproductive measure by abolishing the part of the deductible item to which employers were entitled from the minimum wage. And this again worsened the conditions of employment of the poor.
A deductible deduction item is a measure the should have support from across the political spectrum.
On the one hand, it will increase the net income of employees with the lowest salaries. That’s a strong social measure that helps low-income workers.
On the other hand, this measure will help reduce labor costs for entrepreneurs who employ people in lagging districts. This will support economic activity and entrepreneurship in lagging regions.
Robert Chovanculiak is an analyst with INESS. He graduated from the Faculty of Economics at Matej Bel University in Banská Bystrica, where he also completed his postgraduate studies at the Department of Public Economics and Regional Development. He previously worked as an analyst at the National Agency for the Development of Small and Medium Enterprises. His research focuses on the functioning of the public sector, internet technologies and education.