A key structural reform implemented by Greece as conditionality for its 2010 bailout was reducing the national minimum wage. This policy reform was intended to make the Greek economy more competitive, particularly in labour-intensive areas such as tourism, catering and agriculture. The government has now announced plans to increase the minimum wage for younger workers and pay a housing allowance to economically-disadvantaged citizens.
The Troika demand that Greece reduce its minimum wage to enhance national competitiveness was one of the most difficult reforms to make. It caused a significant reduction in consumer disposable income and therefore in consumer spending at a time where mandatory expenditure such as taxes were increasing. Moreover, it accelerated the decline in GDP, since approximately 70% of the Greek economy was based on household consumer expenditure.
In 2019, national press are reporting a increase in the national minimum wage in Greece. According to sources, the Ministry of Labour will sign an increase of the Greek minimum wage by the end of January 2019.
The current gross minimum wage (including social security contributions is EUR 586.08 per month. This wage bracket covers unmarried, newly employed workers who lack both experience and specialisation.
The new gross minimum wage is reported to increase to EUR 630 per month and will include the previous recipients as well as all young people under the age of 25. As a result, analysts expect that young people will receive a salary increase between 15% and 20%.
A plan to subsidise social security contributions of the ages of 25 and under is also under study. The subsidy will amount to 6.66% of the employee’s gross earnings and will further contribute to the individual’s main pension.
The disbursement of the Housing Allowance subsidy is also expected to commence in the first months of 2019. Based on income criteria, the Greek State will provide a subsidy of between EUR 70-210 per month. This allowance targets low-income families who are renting or paying a first residence mortgage, and is expected to reach about 300,000 families.
Analysts expect that the housing allowance will be applied to individuals and households based on income criteria. Single tax filers with an income of approximately EUR 7,000 per year will be involved, as will married couples with children with an annual income of up EUR 21,000. Property criteria will also apply on real estate and deposits, regarding luxury living, insurance coverage and marital status.
The Greek Ministry of Labour will provide an annual budget of EUR 400 million for this programme. Applications for the programme will take place on an electronic online platform that is developed for this specific purpose and follows the social dividend system already in operation.
The Ministry is working in collaboration with Greek banks on the technical details of the electronic platform. This is because the borrower will be credited with the account of their first residence loan directly to their bank account. The same platform will conduct all the necessary data interaction for apartment rental or purchase contracts using Taxisnet data.
This policy decision by the SYRIZA government should be assessed in light of recent economic developments in Greece:
A national election in Greece is widely expected in 2019, either in May or September. This decision to raise minimum wage and provide a housing allowance should be seen in light of equivalent decisions distributing state resources to key voter groups. This includes, for example, the recent decision to hire 5,000 teachers for the public education system without a civil service exam.
The government has achieved a primary surplus of over EUR 3 billion, and GDP has been rising on top of strong tourism inflows. Given the long-term rescheduling of Greek debt repayments, there is fiscal room for manoeuvre.
A rise in minimum wage will result in higher consumer expenditure. However, it should be remembered that Greece is now a high tax country, and Greek citizens and companies owe over EUR 70 billion in unpaid taxes to the state.
While the higher minimum wage will be good for younger employees (and Greece has a high rate of youth unemployment), it should be remembered that illegal employment is high precisely due to high tax charges and a very difficult economic situation. Many SMEs fail to report income, and are behind on tax contributions, precisely because they cannot keep up with their obligations. It remains to be seen whether SMEs will respond to the new national minimum wage by hiring more young staff, or firing them.
Overall, we believe this is a positive step, but it should be implemented in line with other steps to promote investment and entrepreneurship in Greece while reducing taxes and administrative burdens. Sadly, very little appears to be implemented on this front.
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