The cost of a good wage

A snap­shot the struc­ture and dy­nam­ics of wages in Ukraine to­day

The Ukrainian Week - - CONTENTS - Li­ubomyr Shaval­iuk

Ac­cord­ing to Derzh­stat, the gov­ern­ment sta­tis­tics agency, the av­er­age of­fi­cial monthly salary in Ukraine reached UAH 8,725 (see Salary Re­al­i­ties). In Kyiv, it passed UAH 10,000 in 2017 and to­day it’s over UAH 12,000. Is this a lot or a lit­tle? Com­pared to in­di­ca­tors in Europe, even Eastern Europe, these num­bers are no match. But if they are com­pared to cer­tain do­mes­tic mark­ers in Ukraine, the sit­u­a­tion looks a lot bet­ter. Cal­cu­lated in hard cur­rency, the av­er­age Ukrainian worker made $333 in May. Prior to the great re­ces­sion of 2008-2009, when the hryv­nia fell from UAH 5/USD to UAH 8, the max­i­mum this in­di­ca­tor had ever reached was $399. In 2013, just be­fore to the cri­sis of 2014-2015, it was up to $453, which was sub­stan­tially higher that what it is to­day. But if wages con­tinue to rise at their cur­rent pace, in an­other 12-18 months they should break the record for in­de­pen­dent Ukraine.

From time to time, it’s pos­si­ble to hear fans of the “sta­bil­ity” of the Yanukovych era, who are still abun­dant, tout their fa­vorite line: “Bring back UAH 8 to the dol­lar so that it stays that way for many years and we’ll be happy.” But they don’t say any­thing about how un­re­al­is­ti­cally high to­day’s wages are at the old ex­change rate. In hard cur­rency terms, they are not that dif­fer­ent from what was paid dur­ing the pe­riod of “sta­bil­ity.” This is phe­nom­e­nal given the depth of the cri­sis that the coun­try strug­gled through over 2014-2015. But the main thing is that to­day’s level poses no real threat to macroe­co­nomic equi­lib­rium, un­like back then, be­cause it’s not based on ar­ti­fi­cial, de­lib­er­ate sup­port at the cost of the com­pet­i­tive edge of do­mes­tic man­u­fac­tur­ers, de­clin­ing ex­ports and an enor­mous hole in the balance of pay­ments. With the cur­rent wages, both the em­ployer and the em­ployee have room to grow. This alone would be plenty of rea­son for op­ti­mism.

The other in­di­ca­tor is price lev­els. Ac­cord­ing to Derzh­stat, the Consumer Price In­dex has risen al­most 139% since the be­gin­ning of 2014. But nom­i­nal wages have risen 167%, which is a big­ger in­crease than prices. This means that the av­er­age Ukrainian worker can af­ford at least as many goods and ser­vices as dur­ing the “sta­ble” Yanukovych years. In short, there’s no ba­sis for say­ing that Ukraini­ans lived bet­ter then.

Some will ar­gue that prices ac­tu­ally went up con­sid­er­ably more since the start of the cri­sis. But the of­fi­cial in­di­ca­tor in­cludes the widest pos­si­ble range of goods and ser­vice that are avail­able in Ukraine, mean­ing those prod­ucts whose prices have tripled, to­gether with the dol­lar ex­change rate, and those whose price has hardly changed at all. For com­par­i­son, a num­ber of other price in­dices can be con­sid­ered. Many Ukraini­ans ori­ent them­selves on the cost of food or util­i­ties. So, food prices have gone up 123% over this pe­riod, while res­i­den­tial ser­vices such as wa­ter, power, gas and other fu­els, have sky­rock­eted 350%. So, if wages are com­pared to food prices, Ukraini­ans now earn more bread than they did prior to the cri­sis. But peo­ple for whom res­i­den­tial ser­vices take the lion’s share of their wages have good rea­son to feel that they are poorer than they were un­der Yanukovych. Yet they are the ones for whom the state sub­sidy sys­tem was set up in the first place. So there’s a big ques­tion whether those whose util­ity bills are largely cov­ered by the gov­ern­ment have re­ally be­come any poorer.

The dy­namic of wages in Ukraine in the last few years is in­deed cu­ri­ous and note­wor­thy. Un­der cer­tain cir­cum­stances, em­ploy­ers are not ter­ri­bly in­clined to even in­dex their em­ploy­ees’ wages to in­fla­tion. Yet the wage growth has been out­pac­ing in­fla­tion. A num­ber of causes have con­trib­uted to this. Chrono­log­i­cally, the first fac­tor was a re­duc­tion in the con­sol­i­dated so­cial con­tri­bu­tion (CSC) from 22% start­ing in 2016. Af­ter this change, many politi­cians com­plained that em­ploy­ers were not di­rect­ing all the sav­ings that re­sulted to their em­ploy­ees’ wages, mean­ing that it did not turn out as ex­pected. How­ever, it was af­ter this that wages in Ukraine be­gan to grow at the high pace that we can see to­day. A num­ber of polls taken among em­ploy­ers tes­ti­fied that a sig­nif­i­cant part of the sav­ings on the re­duce CSC did go to em­ploy­ees, al­though not 100%, ob­vi­ously. Even if em­ploy­ees did not get the en­tire difference, there was a pos­i­tive as­pect to it. Start­ing in QII 2016, three months af­ter this cut in the con­tri­bu­tion, in­vest­ments in Ukraine sud­denly bounced up. As a re­sult, the gross ac­cu­mu­la­tion of fixed cap­i­tal has been grow­ing ev­ery quar­ter since then, with real growth rang­ing be­tween 15% and 25%. This very pos­i­tive trend demon­strates that new, more ef­fec­tive jobs are be­ing gen­er­ated that will en­sure higher wages in the re­lated sec­tor down the line.

In fact, this has been ev­i­dent from cer­tain macroe­co­nomic ra­tios (see Tec­tonic Shifts). In 2013, prior to the cri­sis, pay­roll costs, mean­ing wages plus con­tri­bu­tions, added up to nearly 50% of GDP and were 33% higher than gross prof­its and mixed in­comes. In other words, em­ploy­ers were spend­ing more on pay­roll than they were leav­ing them­selves as profit. But this meant they lacked devel­op­ment cap­i­tal, which led to eco­nomic stag­na­tion in the last years of the Yanukovych ad­min­is­tra­tion. When the cri­sis be­gan, wage lev­els stayed al­most the same for some time, but prof­its be­gan to in­crease, be­cause the in­come share was tied to hard cur­rency for em­ploy­ers. Re­duc­ing the CSC share spurred this trend so that in 2016 the pay­roll share of GDP was al­ready down to 37%. In short, com­pa­nies were giv­ing their work­ers a smaller share of the added value gen­er­ated, but many of them ended up spend­ing

the ad­di­tional cap­i­tal on developing the busi­ness and in­creas­ing ef­fi­ciency. This pro­vided the con­di­tions for wages to grow down the line, as we can see to­day.

There were, un­for­tu­nately, also em­ploy­ers who spent the sav­ings from the re­duced CSC nei­ther as in­tended, that is, to in­crease net wages, nor to grow their busi­nesses. See­ing this, the Gov­ern­ment de­cided on a se­cond step in 2017: it dou­bled the min­i­mum monthly salary (MMS), which has gone up no­tice­ably in 2018 as well. This af­fected the av­er­age wage sub­stan­tially, not only and not just as much be­cause cor­po­rate wage scales were tied to the MMS, but be­cause in de­pressed and grey ar­eas of the econ­omy, work­ers were gen­er­ally get­ting just the min­i­mum salary of­fi­cially, with the rest in cash un­der the ta­ble in busi­nesses op­er­at­ing in the shadow econ­omy—or noth­ing in the case of de­pressed sec­tors. In short, rais­ing the min­i­mum monthly salary sig­nif­i­cantly changed the weight of the pay­roll fund in these sec­tors.

This im­pact has also ap­peared in of­fi­cial sta­tis­tics: of the 12 sec­tors of the do­mes­tic econ­omy where wages were ris­ing at a high­erthan-av­er­age pace over 2014-2017, 7 sec­tors, in­clud­ing farm­ing, con­struc­tion and re­tail trade, were be­low-av­er­age in 2013. In other words, low wages in those sec­tors were caused by the fact that the ma­jor­ity of em­ploy­ees were be­ing paid the MMS, so as soon as it be­gan to go up, wage growth was driven up much faster than in other sec­tors of the econ­omy.

Rais­ing the MMS had a pos­i­tive im­pact on macroe­co­nomic ra­tions as well: the GDP share of pay­roll be­gan to go up in 2017, al­most im­me­di­ately af­ter the MMS went up. Of course, this move had neg­a­tive con­se­quences as well, as it sig­nif­i­cantly in­creased the GDP share of shadow and de­pressed sec­tors, which led, for in­stance, to a no­tice­able in­crease in the consumer cost of food­stuff and in­creased mark-ups in the re­tail sec­tor. But the pos­i­tive im­pact so far seems to have out­weighed the neg­a­tive side ef­fects quite thor­oughly.

In ad­di­tion to these two struc­tural ones, there are a num­ber of mar­ket fac­tors that are also driv­ing up wages in Ukraine. First of all, there’s com­pe­ti­tion for Ukrainian work­ers abroad, es­pe­cially in Poland. Ear­lier, a Ukrainian who wanted to go abroad to work had to ex­pend con­sid­er­able ef­fort and take on sub­stan­tial risks: get a visa, typ­i­cally a tourist one; ar­range trans­porta­tion, which was not al­ways easy or ac­ces­si­ble; find an il­le­gal job; and hide from for­eign law en­force­ment agen­cies the en­tire time to avoid de­por­ta­tion. The sit­u­a­tion has changed rad­i­cally. Job op­por­tu­ni­ties abroad are posted on just about ev­ery lamp­post: assem­bly plants in Poland of­fer of­fi­cial em­ploy­ment with salaries in the UAH 20,000 per month range in lo­cal cur­rency. Among all the an­noy­ing, end­lessly flash­ing ads on the in­ter­net, there was re­cently one call­ing for re­bar work­ers to build the sub­way in War­saw. Leav­ing Ukraine is easy: buses to Poland leave just about ev­ery oblast cen­ter sev­eral times a week. To­day, buses go to neigh­bor­ing EU coun­tries from Kram­a­torsk and other cities near the war zone in eastern Ukraine. This means that there are peo­ple there who want to go, whereas, not that long ago, the num­ber of lo­cals who went to Europe for work could be counted on the fin­gers of one hand. In short, the in­fra­struc­ture for “ex­port­ing” Ukrainian la­bor has devel­oped enor­mously in the last few years. So, if lo­cal man­u­fac­tur­ers want to hire de­cent lo­cal work­ers, they now have to com­pete with com­pa­nies in Poland, Czechia and else­where. This means rais­ing wages and do­ing every­thing to keep in­creas­ing them and re­main com­pet­i­tive on the do­mes­tic la­bor mar­ket.

Sec­ondly, wage lev­els in a slew of sec­tors is closely linked to the hryv­nia ex­change rate. For in­stance, of pro­gram­mers are not paid a de­cent dol­lar or euro salary, they will eas­ily find work out­sourc­ing for some for­eign com­pany that will pay them in for­eign cur­rency. This pushes wages up in cer­tain sec­tors in re­la­tion to the dol­lar or euro ex­change rate. That also ex­plains why the av­er­age salary in the in­for­ma­tion and com­mu­ni­ca­tions tech­nol­ogy (ICT) sec­tor rose 161% over 2014-2017. If IT com­pa­nies are sep­a­rated out, the level of salaries in that sec­tor prob­a­bly rose 200-300% and more. In avi­a­tion, salaries tripled, re­flect­ing both the global na­ture of the sec­tor and the hard cur­rency di­men­sion of salaries, as well as the strong growth of air trans­port in Ukraine over the last few years.

Thirdly, there are sec­tors that have had a sig­nif­i­cant boost thanks to changes that have taken place in the coun­try since the Euro­maidan. For in­stance, light in­dus­try, where the key fac­tor is low la­bor costs, has been grow­ing by leaps and bounds. This has been driv­ing de­mand for work­ers, which is ev­i­dent from the large num­ber of ad­ver­tise­ments look­ing for pro­fes­sional stitch­ers. Over 2014-2017, the av­er­age wage in the in­dus­try grew 190%, no­tice­ably higher than the in­dus­try av­er­age and the over­all econ­omy. Mean­while, bud­get ex­pen­di­tures on salaries for mil­i­tary per­son­nel in­creased 207% dur­ing this pe­riod, and an­other 23% over Jan­uaryMay 2018. The rea­sons there are ob­vi­ous to all.

So, the rise in salaries ob­served over the last three years has been driven both by Gov­ern­ment pol­icy, such as re­duc­ing the CSC and in­creas­ing the MMS, and by mar­ket fac­tors. In both cases, the re­sult has been pos­i­tive: wages are go­ing up and the stan­dard of liv­ing of or­di­nary Ukraini­ans is get­ting bet­ter. Over 2014-2015, there was a vis­i­ble de­cline in the num­ber of shop­pers and a phe­nom­e­nal num­ber of pen­sion­ers beg­ging in the streets, some­thing that had not been ev­i­dent dur­ing the global cri­sis of 2008-2009. To­day, shop­ping chains are filled with traf­fic and there are vis­i­bly fewer beg­gars.

All this would be won­der­ful if not for one “but.” The thing is, that the nor­mal salary range is de­ter­mined by the struc­ture and tech­no­log­i­cal level of a coun­try’s econ­omy. The crises of 20082009 and 2014-2015 that the tech­no­log­i­cal ceil­ing for av­er­ages for Ukraine is around $400-450: any­thing that’s higher tends to not last long and is even­tu­ally ad­justed when the hryv­nia is de­val­ued and an­other cri­sis looms. This means that Ukraine is al­ready ap­proach­ing its wage ceil­ing.

To raise that ceil­ing sig­nif­i­cantly, years, if not decades, of macroe­co­nomic sta­bil­ity and reg­u­lar in­vest­ment are needed, and, of course, at­trac­tive con­di­tions for in­vestors. And this is where prob­lems tend to arise: the coun­try has a huge for­eign debt bur­den that needs to be ser­viced and paid off, and if co­op­er­a­tion with the IMF is not re­stored, the coun­try could face yet an­other cri­sis in 2018-2019. If that starts, Ukraine will once again be un­able to raise its tech­no­log­i­cal ceil­ing sub­stan­tially and Ukraini­ans will once again find their stan­dard of liv­ing in col­lapse as the hryv­nia de­pre­ci­ates. How well can the coun­try sur­vive yet an­other eco­nomic de­cline and what will it look like when it emerges again? This is the ques­tion the gov­ern­ment to­day needs to con­cern it­self with most of all.

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