Minimum wage violation in central and eastern Europe

• Published date: 01 June 2019
• Date: 01 June 2019
• DOI: http://doi.org/10.1111/ilr.12086
• Author: Karolina GORAUS‐TAŃSKA,Piotr LEWANDOWSKI

International Labour Review, Vol. 158 (2019), No. 2

Copyright © The authors 2019

Journal compilation © International Labour Organization 2019

* University of Warsaw, Faculty of Economic Sciences, email: kgoraus@wne.uw.edu.pl;

** Institute for Structural Research (IBS), email: piotr.lewandowski@ibs.org.pl. The authors

would like to thank Szymon Górka for his excellent research assistance, Andrea Garnero for

reviewing the draft version and, for their helpful insights, the participants in the IBS Jobs Con-

ference 2015 held in Warsaw, the 2016 Warsaw International Economic Meeting (WIEM), the

28th Conference of the European Association of Labour Economists (EALE) held in Ghent in

2016, and the 2016 Jobs and Development Conference held in Washington, DC. They also thank

Attila Bartha, Vera Czesaná, Katarina Gandzalova, Peter Goliáš, Bogusław Gruzewski and Lija

Luste for providing information about minimum wage regulations in particular countries. This

article uses Eurostat data but responsibility for results and the conclusions rests solely with the

authors. This article was nancially supported by the Network on Jobs and Development initia-

tive under the auspices of the World Bank. The usual disclaimers apply.

Responsibility for opinions expressed in signed articles rests solely with their authors,

and publication does not constitute an endorsement by the ILO.

Minimum wage violation

in central and eastern Europe

Karolina GORAUS-TAN

´SKA* and Piotr LEWANDOWSKI**

Abstract. This article analyses minimum wage violations over the period 2003 –12

in ten central and eastern European countries which all have national statutory

minimum wages. Using European Union Statistics on Income and Living Con-

ditions (EU-SILC) data and the methodology proposed by Bhorat, Kanbur and

Mayet (2013), the authors measure the incidence and depth of violation. In addi-

tion, they conduct regression analyses on individual, workplace and macro-level

determinants of non-compliance. While the incidence of violation remains rela-

tively low, the workers that minimum wage policies seek to protect appear to be

the most likely to be affected by non-compliance. Over time, higher minimum to

average wage ratios are related to a higher incidence of violation.

T

he impact of minimum wage policies continues to attract the attention of

researchers and policy-makers in both the developed and the develop-

ing world. Workers in countries that are undergoing a rapid increase in GDP

per capita often demand that the minimum wage be raised, while minimum

wage policies may also be implemented in economies that struggle with in-

work poverty or wage inequality. The Great Recession sparked a renewed

interest in such policies around the world (OECD, 2015). Most of the policy

debate and the economic literature on minimum wages focus on employment

effects (Neumark and Wascher, 2006) and, to a lesser extent, on earnings in-

equality (Autor, Manning and Smith, 2010) and poverty in developing (Saget,

International Labour Review298

2001) or developed (MaCurdy, 2015) countries. Yet, even as commentators

on this issue express their hopes and concerns regarding the impact of min-

imum wage laws on the labour market, it is important to keep in mind that

enforcement of, and compliance with, these policies are also crucial factors

for their success. A proper measurement of compliance and the identica-

tion of the tactics used to violate minimum wage laws are necessary in order

to explain the functioning of minimum wage policies in particular countries.

Ashenfelter and Smith (1979) introduced a prot-maximizing model of non-

compliance that considered the probability of getting caught and the penalty

incurred if caught. Basu, Chau and Kanbur (2010) showed that governments

concerned only with efciency may choose to enforce the minimum wage

imperfectly in the face of costly enforcement. Bhorat, Kanbur and Stanwix

(2015a) proposed a model of partial compliance whereby employers violate

the minimum wage but raise wages some of the way to the minimum wage

because the probability of getting caught depends on the depth of violation.

Danziger (2009) argued that if workers are income risk averse and “impru-

dent”, an increase in the minimum wage rate raises welfare even in the pres-

ence of non-compliance. However, few empirical studies of minimum wage

violations have been conducted, especially in a multi-country setting. These

issues are usually analysed in respect of developing countries (see Rani et

al., 2013; Bhorat, 2014; Bhorat, Kanbur and Stanwix, 2015 b; Ye, Gindling and

Li, 2015; Marinakis, 2016), although Garnero, Kampelmann and Rycx (2015)

also provide some evidence on non-compliance (and non-coverage) in the

countries of the European Union (EU).

Through this article we seek to contribute to this emerging branch of

literature by analysing minimum wage violations in ten central and eastern

European (CEE) countries that joined the EU in 2004 or later, by identifying

the characteristics of workers who are most exposed to non-compliance and

by identifying patterns of change in non-compliance over time. These countries

are especially well suited to a cross-country study on this issue as they all have

national statutory minimum wage systems that cover all employees, and they

are at comparable levels of development. They also share the recent experience

of joining the EU, which means that they have been integrated into a union in

which many member countries offer higher wages for low-skilled work. The

existing literature on the role played by minimum wages in CEE countries is

relatively scarce and focuses on employment effects.1 To our knowledge, this

article is the rst study of minimum wage violations in CEE countries.2

The remainder of the article is organized into ve sections. In the rst

section we outline the minimum wage regulations and developments in the

CEE countries under consideration. The second section presents the method-

ology, as proposed by Bhorat, Kanbur and Mayet (2013), that we use to ana-

1 See Hinnosaar and Room (2003), Eriksson and Pytlikova (2004), Fialová and

Mysíková (2009), Baranowska-Rataj and Magda (2015), Kamińska and Lewandowski (2015),

and Slovenia (2017).

2 In this article we use “violation” and “non-compliance” as synonyms for situations in

which workers covered by minimum wage regulations are paid less than the legal minimum.

Minimum wage violation in central and eastern Europe 299

lyse both the incidence of minimum wage violations and their monetary depth,

and describes our data set. In the third section, we present our estimates of

the violation measures over the period 2003 –2012, the individual- and the

rm-level correlates of non-compliance estimated with probit models, and the

results of panel regressions at the country level. The fourth section presents

policy experiences and discusses the institutional features of CEE countries

that may have contributed to the patterns of non-compliance that we identify.

In the last section, we summarize our ndings and discuss the policy implica-

tions of our results.

Minimum wages in central and eastern Europe

In 2015, of the 28 EU Member States, 22 had statutory national minimum

wages. Eleven of these countries were CEE countries that joined the EU in

2004 or later: Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Lat-

via, Lithuania, Poland, Romania, Slovakia and Slovenia. This is the group of

countries that we focus on in this article.3 For reasons of data availability,

we have chosen to exclude Croatia. We refer to the remaining group as the

CEE-10 countries. The EU countries without a national minimum wage had

minimum wages at the industry (Austria, Denmark, Finland and Italy) or oc-

cupational (Cyprus) levels, usually as a result of collective bargaining. Such

procedures were not followed by any of the CEE-10 countries. The minimum

wage arrangements in these countries are summarized in table 1.

A common feature of minimum wage systems in the CEE-10 countries is

that they cover all workers in wage employment under a single, widely known,

national minimum wage.4 In all of the CEE-10 countries the minimum wage

was set at a monthly rate, although an hourly rate was also explicitly speci-

ed in several countries. Poland, Slovakia and the Czech Republic (until 2012)

had sub-minimum wage levels for young workers or labour market entrants.

The Czech Republic, Hungary and Slovakia set higher minimum wage levels

3 According to Eurostat, the other EU countries with statutory national minimum wages

in 2015 were Belgium, France, Germany, Greece, Ireland, Luxembourg, Malta, the Netherlands,

Portugal, Spain and the United Kingdom. The national minimum wage was introduced in Ger-

many on 1 January 2015.

4 The self-employed are not covered by a minimum wage in any of the CEE-10 countries.

This can be an issue in cases of bogus self-employment. Although such employment represents

a broader form of non-compliance with labour regulations, it may to some extent be driven

by a desire to circumvent minimum wage laws. In Poland, for instance, the minimum wage is

not binding for civil law contracts (a type of temporary contract). However, the use of such

contracts is prohibited if a worker is economically dependent on a company. Thus, contracting

an employee using a civil law contract can be interpreted as a violation of labour regulations

and as a deliberate violation of minimum wage laws if the worker earns less than the equiva-

lent of a monthly minimum wage. In practice, it is impossible to distinguish civil law contracts

from other temporary contracts in available survey data as they are clustered together as tem-

porary contracts in the EU Labour Force Survey (EU-LFS) and EU Statistics on Income and

Living Conditions (EU-SILC) databases, and are not covered by EU Structure of Earnings

Survey (EU-SES).