Minimum wage and loss of consumption power from lack of actual indexation

Open Data Albania is conducting a research concerning the indexation of the official minimum wage in Albania over the years, more specifically during 2000-2022. During this period there has been a regular increase in the formal minimum wage, excluding 2007, 2014-2016, 2018 and 2020. For 2022, the minimum wage increased in advance in April, although it was planned for mid-year. The move came a result of the hike in the level of prices, due to rising economic costs, following the Russian aggression in Ukraine. When we look at the annual change in inflation (CPI) from January 2021-March 2022, we can clearly see the upward trend in prices, culminating in the latter.

Source: INSTAT, Statistical Database
Comments and Analyses: Open Data Albania

Source: World Bank, Statistical Database
Source: INSTAT, Statistical Database
Source: INSTAT
Comments and Analyses: Open Data Albania

Source: INSTAT, Statistical Database
Comments and Analyses: Open Data Albania

The minimum wage is the lowest wage (remuneration) employers can declare they paid their employees. Based on the declaration, the net salary is calculated after the deduction of taxes and mandatory social contributions. The minimum wage is defined via sub-legal act and becomes an obligation by law. The salary that employees actually receive is the net minimum wage, is the minimum wage after the abolition of taxes, health and social insurance. Specifically, for a minimum wage of ALL 32,000 (declared), the employee receives a net salary of about ALL 28,000 as the rest is deducted as mandatory contribution taxes. The indexed minimum wage, subject of this article, is calculated based on the previous year ‘s minimum wage, plus the previous year’s inflation rate. In principle, the indexed minimum wage makes it possible for citizens receiving the minimum wage to buy in the present the same amount of products and services they bought with the previous minimum wage.

If we examine the minimum wage and apply some simple calculations, we can find out how much is the annual loss of consumption power resulting from the official minimum wage not being indexed (in the opposite cases, we will look at how much consumption power is gained in ALL through the indexation). Hence, looking at the 2001-2022 period, turns out that the largest annual loss due to non-indexation of the minimum wage, is in 2016. Citizens who were paid with the minimum wage, due to non-indexation, earned ALL 19 066 less than they should have been, in order to maintain the same living standard as in 2013 (ie the last official minimum wage indexation). Equally, employees – paid a minimum wage- were paid less than should have been in 2003, 2004, 2007, 2014-2016, 2018, 2020 and 2022. Also, in 2022, although we had an increase in the minimum wage of ALL 2000, compared to the previous year, it is not enough to cover the increase in the level of prices, based on the INSTAT calculations. To assess the losses in the most accurate way, we divided 2022 into two parts: before the indexation of the minimum wage (January-March 2022) and after (April 2022). Until April, the loss has been in the amount of 1800 ALL for the first 3 months. The estimation was based on the 2021’s inflation rate (change in the level of prices). After the latest indexation of the minimum wage, the calculations are based on the March 2022 inflation rate. Thus, the loss for the April-December period 2022 is estimated in the amount of ALL 3 098/ 9 months. Overall, despite the formal increase in salary, the loss from the inability to cope with the inflation level, for a citizen who works at the minimum wage, is estimated in the amount of 4 898 ALL 12 months.

Source: World Bank, Statistical Database
Source: INSTAT, Statistical Database
Source: INSTAT
Comments and Analyses: Open Data Albania

For a full comparison, on how much money the Albanian citizens – living on minimum wage- actually receive, we’ll make the same distinction as above. Even when taking into account the net minimum wage, it emerges that citizens suffered loses the very same years as in the first case. When we consider the 2015-2022 period, the net minimum wage was not indexed in the following years: 2015, 2016, 2018, 2020 and 2022. In 2016, citizens who were paid with the minimum wage had the biggest loss, amounting to ALL 12 153, resulting from the difference between actual income they earned after taxes and increase in the general level of prices.

Source: INSTAT, Statistical Database
Comments and Analyses: Open Data Albania

To further expand the perspective on wage indexation, we also study the case of the average wage in the Public Sector. The data was retrieved from the INSTAT archives for the 2001-2020 period and we’ll look at whether the average salary was indexed or not during this time. The losses in 2014 and 2018 are relatively small, but in 2016, they are estimated 1 403 ALL/month or 16 832 ALL/12 months.

Source: World Bank, Statistical Database
Source: INSTAT, Statistical Database
Source: INSTAT
Comments and Analyses: Open Data Albania

If we consider the general average salary (for all employees: in the public and private sector), it turns out that during 2015 – 2020, there was only one case when the average salary was not indexed, in 2016. The loss in this case is 2 055 ALL/month or 24 661 ALL for the whole year. We only considered the 2015 – 2020 period, as INSTAT lacks data on the average salary in the private sector and as a consequence, also on the general average salary, before 2014.

Source: World Bank, Statistical Database
Source: INSTAT, Statistical Database
Source: INSTAT
Comments and Analyses: Open Data Albania

As we can see, the loss of consumption power from non-indexation in the general average wage, the wage in the public sector and the minimum wage, was higher in 2016. In short, in all three cases, 2016 emerges as a negative record for the 2000-2022 period.

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Comments and Analysis: Open Data Albania
Translated by: Rezarta Cushaj
Contributed by: Ilir Brasha