Facts and Analysis. How do Minimum Wage Increases Affect Companies?

2014, October 23rd, Vilnius – A survey conducted by the Lithuanian Free Market Institute shows that a rise in the minimum wage negatively affects Lithuania’s businesses and hurts workers. Of the 181 companies questioned, every third said that the 2012 and 2013 increases in the minimum wage had a negative impact on their businesses. If the minimum wage were to increase by 200 litas (€ 57,92) in 2015, it would impair 46 percent of the surveyed companies.

“It is a shame that in Lithuania increases in the minimum wage are based on political, not economic, logic. On paper, it may look like it makes people richer, but in reality it puts workers at a disadvantage. As a consequence of increasing the minimum wage, some companies will have to reduce salaries or even fire employees,” says LFMI President Žilvinas Šilėnas.

According to the survey, the rise in the minimum wage in 2012 and 2013 led about a third of the surveyed enterprises (35 percent) to abandon their business development plans. If the minimum wage were to increase by another 200 litas (€ 57,92) in 2015, almost half (48 percent) of the surveyed companies would scrap or delay their plans for future development.

“Increasing the minimum wage deprives companies of the option to decide where to best spend the organization‘s money,” LFMI Senior Policy Analyst Vytautas Žukauskas says.

The surveyed companies lowered their payroll as a direct consequence of the increased minimum monthly wage in 2012 and 2013. Some companies dismissed employees (17 percent) or reduced working hours to part-time (15 percent).

If the minimum wage were to increase by 200 litas (€ 57,92 ) in 2015, a total of 29 percent of the surveyed companies would cut jobs and another 30 percent would reduce working hours. In addition, every fifth company would lower salaries of the employees who earn more than the minimum wage.

“Of course, an increase in the minimum wage is no issue for companies which already pay higher salaries. However, the survey we conducted shows that a rise in the minimum wage negatively affects businesses, especially those which are in unstable financial shape and which employ many minimum wage earners. Some of the companies have had to fire employees or cut their working hours. We understand that for people in such organizations salaries do not increase and there is also a risk of losing jobs,” Vytautas Žukauskas says.

The minimum wage has been raised three times in recent years, from 800 to 850 litas in 2012, to 1000 litas in 2013 and to 1,035 litas (€ 299,76) in October 2014. “There are better ways to improve living standards for people who earn low salaries. Firstly, politicians seem to forget that they can increase non-taxable income instead of raising the minimum wage. This way people would earn more and company costs would not grow. Secondly, we would improve conditions for investment and see more businesses paying more than the minimum wage,” Žukauskas noted.

If the non-taxable income were raised to equal the minimum wage (1,035 litas/ € 299,76), the net earnings would approximately increase from 870 litas (€ 251,97) to 941 litas (€ 272,53). 

A total of 181 Lithuanian companies took part in the survey. Most of the companies (47 percent) are based in the Vilnius and Kaunas regions, while others are located in the Šiauliai, Panevėžys, Utena, Telšiai, Alytus, Klaipėda, Marijampolė and Tauragė regions. Of the surveyed companies, the largest group (66 percent) comprised organizations with up to 50 employees, and 65 percent employed minimum wage earners. The survey was conducted in the summer of 2014.

Download the corporate survey (in English) Facts and Analysis. How do minimum wage increases affect companies?