The cost of budget and business from salary increases inflation and side effects for the labor market

At the end of March 2022, after the meeting of the Council of Ministers, in a statement to the media, Prime Minister Edi Rama announced the national plan for increasing average and above average salaries for the public administration and the reflection that the private sector will have in this direction. With this initiative of the government, it is intended that the increase of the average salary will reach up to 900 euros (103,500 Lek)[1], which will be realized through two phases.

Earlier, the Council of Ministers approved the salary increase of doctors and nurses by 7%, while the salary of specialist doctors was increased by 50 thousand new ALL. The Prime Minister also stated that the government will keep its promise to provide an additional pension of 5,000 new lek for all pensioners[2]. The national plan is expected to become transparent for citizens and all businesses in the coming weeks.

In our analysis, the point of the political program of the Socialist Party government is taken into consideration, after the victory in the parliamentary elections of April 25, 2021[3], for increasing the average gross monthly salary in the administration by 25% gradually until the end of the mandate (from ALL 72,000/month to ALL 85,000/month). In the absence of a prior consultation, very necessary for this technical discussion and quite delicate in the comprehensive approach that should be taken, our experts and partners are analyzing and studying data that includes statistics on salaries in the public and private sector, salary funds respective to these sectors, as well as their trends. All this research analysis is done to say how much a public sector wage increase would cost the government. Calculations can be clearer and more accurate only for the public sector, since the private sector does not have transparent data for use, but also the influence of the informality factor on the labor market, in the economy, as well as tax evasion affect and influence inaccuracies of calculations.

From the preliminary announcement of No. 1 of the Government, the average salary until 2025 will increase by 39% compared to the average salary in the IV quarter of 2022. With the same decision-making method, the minimum wage will increase by 32.35% compared to the average wage in the IV quarter of 2022.

The Government Decision (113/1.3.2023) has already been approved for the 17.6% increase in the minimum wage from April 1, 2023[4] compared to the average salary in the IV quarter of 2022.

So, for the minimum wage, the next increase will be 14.7% more in the years 2024-2025. But how much would it cost for the Albanian budget a salary increases to public sector employees with the last announcement?

With an average salary increase of 39% including the year 2023, the total public sector salary fund in 2025 should reach 103-104 billion ALL, plus 2-2.6 billion ALL insurance contributions. This increase is calculated to cost the budget up to 15.5 billion additional lek, in addition to the 11.3 billion lek that has already been planned as new salary policies. The public sector salary increase policy, with the effect of increasing the average salary in total, costs up to 26.8 billion ALL for the next three years. Using the average figure of 7% for the consumer price index announced by the Bank of Albania, the real cost would be 1.7 billion Lek less expensive.

According to the Fiscal Indicators of the consolidated budget until 2025[5], as well as the PBA 2023 – 2025 of the Government[6], but also the Program of Economic Reforms 2023 – 2025[7], for these three years the salary fund is expected to increase with 13%. From this increase, the salary fund of the budget sector from 88.9 billion ALL in 2022 will reach 100.7 billion ALL in 2025. For the new salary policies of the public sector during 2023-2025, an additional 11.3 billion ALL are calculated to be paid from the state budget. This fund cannot afford the cost increase to reach the average salary of 900 Euros. In the past (2019-2022), the additional salary fund of 11.1 billion ALL has fueled an average salary increase of up to 16.6%. According to the decision taken by No. 1, a salary increases of 39% (in two stages) would cost 60 thousand Albanian families[8]  7.8 billion lek in taxes and higher contributions as an effect that comes from the increase in average salary 39%[9]. For each family paid by the public sector with the current average salary of 74,450 ALL/month with the increase of the average salary by 39%, it will pay 84,360 thousand ALL/year more, as obligations for contributions and tax on the salary.

When we shift the analysis to the private sector, if a 39% average wage growth rate were to be applied, taking as the basis for the analysis the same historical period (2019-2022), as well as the same implementation period (2023-2025), then the average wage fund of the private sector in 2025 should reach 173 billion Lek, with a 33.2% increase from the average wage fund in 2022. According to the calculation made by ALTAX experts, the total salary fund (minimum salary, average salary and high salary) of the private sector in 2022 is 424.6 billion ALL (3.7 billion Euro). About 40% of the wage fund consists of the average level wage fund. In 2022, the level of the average salary is ALL 62,198/month, with a 27.5% increase from 2019, where the main impact can be found in the IV quarter of 2022, with an 8% increase or as much as 30% of the entire increase in the average salary of the private sector.

When inflation started to rise in 2021, driven first by energy inflation, then by supply constraints, especially for goods, but later also for services in the context of the economic reopening, a substantial gap opened between nominal wage growth and real customers. This reflects the strong impact of labor, which has so far been resisting the economic slowdown, as well as some deadlock between wages and high inflation rates. Beyond the near term, the expected economic slowdown and uncertainty about the economic outlook are likely to strengthen the upward pressure on wages.

In 2022, the average private sector salary is 84% ​​of the average public sector salary level, with a level approaching 8% if we check until 2019.

Kjo tendencë duket se do vazhdojë të afrohet me shpejtësi, për arsye të shkurtimit të fuqisë punëtore, si dhe rritjes së kërkesave të punonjësve të rinj për një pagë më të lartë dhe dinjitoze si kompensim të kontributit të tyre bazuar në aftësitë që zotërojnë.

The average salary in the public sector, in the years 2019 – 2022, increased by 16.6%

The average salary in the private sector, in the years 2019 – 2022, increased by 27.5%[10]

Despite such a diverse impact on sectors of the economy, changes in overall wage growth due to sectoral composition remained limited as job retention schemes contained employment changes. During the recovery, changes in employment across sectors have had only a slight positive impact on compensation per employee and hourly compensation for the total economy. However, the value of employment may not have changed simply within sectors, especially in those sectors where employment has fallen, but also by the composition of workers and occupations. Such changes, for example in the level of education and specialization, affect the increase of wages at various levels.

The highest level of average wage growth for this period occurred for workers, technicians, farmers, free professions, and trade employees.

Wage growth has fluctuated widely across all major sectors of the economy since the start of the pandemic.

The pandemic and government measures to mitigate its impact have contributed to major changes in sectoral value added, average working hours, productivity and wage growth. This reflects the different degrees to which wage increases and participation in job retention schemes have affected different sectors over recent years. The highest average salaries according to the sectors of the economy are seen in the trade and services sector, communication, and IT, as well as in industrial production and processing, but also in the financial and insurance sectors. A moment where the analysis stops to express concern about the delicate moment that produces large and immediate increases, which have not happened for a long time. A concern conveyed through this analysis is related to the risk of violation of standards, or Labor Rights, which in the Labor Code are considered as employment relationships[11].

Now, they should return to the attention of the government with a new program. The reason behind this is related to the effects that come from the implementation of the government’s decision to increase the minimum wage from April 1, 2023, as well as the announcement of the consequent increase in the average wage of the public sector, asking businesses to act in the same approach. However, an increase in the minimum wage, as well as an increase in the average wage, will also increase the wage fund, which in the most minimal case would have to increase by at least 30% compared to 2022. An increase in business costs from the effect of wage increases risks leading to the non-respect of employees’ rights regarding maximum working time and minimum rest time, the minimum duration of paid annual leave, employment and working conditions, as well as reducing expenses for training and strengthening skills.

All of this affects all the work done to date, it affects the relations of trade unions with employers, as well as professional business organizations and civil society, who have worked and achieved some better standards than before, now the contribution can be jeopardized. In this case, they have had in front of them the mentality of not implementing the law, the missing institutions with the inaction to reduce informality and create the conditions for a better environment for doing business.

The main consideration here is the effectiveness of policies for implementing standards at work. 

Will they improve human rights among potential market partners?

Or will they slow progress toward human rights by keeping workers politically powerless and mired in poverty?

The advocates of the rights at work can at these moments strongly demand the implementation of all the requirements that must be respected by employers according to the Labor Code and other acts related to it. And, when the rules are strongly demanded by the regulatory institutions, which have the task of monitoring the work standards, then the increased pressure will further increase the overall cost on the businesses. In this case, additional costs will increase, in addition to those that may be dictated by the government’s initiative to increase the average salary. This is a request to bankrupt companies, rather than a fair request that can find the solution that has not been found for many years.

But, in addition to the risk of greater implementation and formalization of work, even young employees have already increased their demands and pressure on employers for higher wages and a dignified working environment, starting from the difficulty in the market to find employees. With advanced quality, the new employees clearly stand out positively from the old employees, who do not know the culture of the demands for salary increase and a decent working environment. The new culture is replacing the old, fostering a quite different environment and relationship, where employees are stronger in raising their voice for their rights.

However, the best time to normally ask for a raise is now, as the momentum is in favor of employees. Most companies are looking for new employees with the right performance for businesses and the fulfillment of commercial contracts, after the layoffs that began to be widespread during the pandemic. It is always a clever idea to re-establish dialogue between employers and employees and renovate the social contract. But now the dialogue is necessary and vital to discuss the model of new labor contracts, as well as the costs needed to meet the implementation of all labor rights. In this reformatted report, the National Labor Council and the institutions that have a field of action in the labor market must serve as regulators to prevent the demand and supply in the market from becoming unbalanced starting from the unfavorable moment for company administrators.

The time has now come for the government to re-emerge its lost values ​​over the years, which it has included in the new Strategy for employment and training 2023-2030[12], but also in many new policies that are in the process of processing or implementation. Even for No. 1 of the Government, this moment can serve very well for a policy/package systematized/grouped around addressing the problems that encourage migration so strongly in recent years.

Despite nominal wage increases hitting a record high between January 2022 and January 2023, workers are seeing their purchasing power decline or nearly offset, based on preliminary inflation figures. Starting from the historical moment, where the determination of the minimum wage was made under the shadow of elevated levels of inflation, to protect the income of employees with average wages, the government made a fair decision to increase the minimum wage to a large extent. greater than in previous years. The purchasing power of employees can be monitored by looking at real wage developments in consumer facing. Apart from the fourth quarter, consumption has been at a very low level, and by this we understand that we are dealing with a cost factor and not an income item, so the calculation requires an increase in wages, but at various levels. after all the different effects and impacts have been analyzed and calculated.

Real manufacturing wages can be derived by adjusting nominal wages using value-added deflators, which measure the prices charged to produce goods and services in the economy. Real consumer wages show how severe the losses in purchasing power have been for workers. To the extent that employees try to compensate for this loss of purchasing power, this may affect nominal wage demands.

Real wages of producers reflect the cost pressures implied by the increase in nominal wages relative to the general increase in the price of production. All the labor market (employers and employees) needs is the news that the government has a well-structured, realistic, and focused plan. This plan, which must be linked to the new strategy for employment, must also reflect the problems that may arise from the government’s sudden initiatives to make politics with the economic and social problems of Albanian citizens.

[1] According to the average exchange rate January – March 2023, 1 Euro = 115 Lek (ALTAX calculation)
[2] https://www.kryeministria.al/rritje-e-pages-mesatare/
[3] Programi Qeverisës 2021 -2025. Faqe 16. Well-being for all. We increase the average gross monthly salary by 25% gradually until the end of the mandate.Programi Qeverisës 2021 -2025. Faqe 18. Salary increase. We increase the average salary in the administration, from 72 thousand ALL/month to 85 thousand ALL/month until the end of the third term
[4] https://qbz.gov.al/eli/vendim/2023/03/01/113/44a50860-2278-43a8-8835-2206bd468149
[5] https://financa.gov.al/wp-content/uploads/2022/12/Tabela-4-Treguesit-fiskale-t-2-deri-t2-2023.xls
[6] https://financa.gov.al/programi-buxhetor-afatmesem-2023-2025-faza-iii
[7] https://www.konsultimipublik.gov.al/documents/RENJK_596_draft-ERP-2023-2025-1.pdf
[8] The number of employees of the budget sector (without public enterprises) in 2023 reaches 84,818 employees. A part of the employees, close to 30%, are on the minimum wage, or below the average wage
[9] For the 39% increase in the average salary, for the 2 phases together close to ALL 2.34 billion insurance contributions plus close to ALL 5.44 billion for 2 years of salary tax are paid
[10] https://www.instat.gov.al/media/11344/statistikat-e-pagave-t4-2022.pdf
[11] The employment relationship, which is created according to the cases provided for in point 1, of Article 3/1, is regulated by the provisions of the Albanian legislation, related to:a) maximum working time and minimum rest time;b) the minimum duration of the annual paid leave;c) the minimum wage level;ç) the conditions for the temporary employment agency;d) safety, health, and hygiene at work;dh) employment or work conditions for pregnant women or women who have just given birth, for young people, children and persons with disabilities;e) the principle of equal treatment, including the provisions of the collective contract.
[12] https://qbz.gov.al/eli/vendim/2023/03/24/173/006a8e4b-bc79-4032-9553-60814bc2527f