Bringing salaries out of the shadow economy

Ukraine appears to have actually started on reforms that may improve its international image. Serhii Tihipko, deputy prime minister and minister of social policy, familiarized journalists with them on April 4. He began by saying that practically all politicians, especially opposition ones, had spoken a lot about the need to “legalize” all wages and salaries, but that when he asked them, a month ago, to submit written proposals relating to this extremely important reform, no one responded, not even the trade unions. Hence the government’s three bills. (Friday, April 1, Natalia Korolevska, chairperson of the VR’s industrial, regulatory and entrepreneurship policy committee, held a roundtable under the eloquent heading: “Bringing the Labor Market out of Shadow Economy: Balance of State and Society Interests.”)

Deputy Prime Minister Tihipko once again (following similar occasions over the past couple of days) explained the reasons behind the government’s concern over the issue, saying 2.5 million people were receiving minimum pay in Ukraine. Naturally, they are levied low taxes and deductions to social funds by paying the so-called single social fee. Tihipko said he could see a million people getting this kind of pay, but never 2.5 million. Likewise, it would be unrealistic to expect the managers of all such businesses in Ukraine (120,000 to date) to receive such minimum salaries. In a roundabout way he referred to “sufficient reserves,” implying that even 1.5 million employees and 120,000 managers were receiving under-the-counter pay envelopes. Interestingly, in the state/public sector the average monthly pay is 2,800 hryvnias, whereas in the private sector it is less than 1,700 hryvnias. Before the financial crisis, the situation was the exact opposite. Does this mean that business is saving money by paying under-the-counter wages? Tihipko referred to the statistics of the National Academy’s Institute of Demography: there are approximately 145 billion hryvnias’ worth of “envelope payrolls.” His statistics read that roughly one half of the private sector remains uncovered by sectoral contracts meant to regulate wages and salaries, where the sole criterion is the minimum [monthly] wage, officially set at 960 hryvnias as of this month.

What does the Ukrainian state intend to do to change this situation and replenish the social funds? They started by specifying the notion of the minimum wage: no compensatory bonuses, except those due for hazardous or night-time jobs.

Most importantly, the Cabinet intends to introduce the notion of guaranteed pay, proposing eight payroll categories, starting with the lowest one for least qualified, then on to medium qualified, adequately, and highly qualified labor and technical personnel, and with the highest salaries going to managers/CEOs. These categories apply to the private sector, where businesses aren’t bound by sectoral contracts. Minimum wage coefficients are envisaged for all those employees.

“We keep the public sector well under control… Guaranteed pay is the most important notion to be introduced,” Tihipko declared.

The Ukrainian government also wants to impose legal responsibility on all business entitles for any payroll violations, including a fine worth 2,000 “untaxed minimum wages” (34,000 hryvnias) to be levied in retaliation for evading employment contracts, in case of actual work having been done, along with all due bonuses, less insurance and/or tax payments, per employee. In each such case, the employer at fault will have to pay each such employee at least “150 untaxed minimum wages” (2,250 hryvnias), with both the company, as a business entity, and its management, as individuals, being held legally responsible. They will have to pay fines worth at least 10 times more than now (50 untaxed minimum wages then and 500 now), so that a manager can be fined 8,500 hryvnias. In fact, Tihipko believes this sum isn’t too heavy a blow, considering that similar transgressions are worth the equivalent of 83,000 hryvnias in Bulgaria; up to 100,000 in the Czech Republic, and some two million in Slovakia.

These innovative projects will be supervised by the Labor Inspectorate and Tax Service.

What does the Ukrainian government expect in return? Hungary added 20 percent to its national payroll after taking similar measures; Bulgaria managed 25 percent, with the deductions to social funds increasing accordingly. “These are the examples we will emulate,” said Tihipko. He went on to say that such innovative measures would formalize the employee-employer relationships: “These people are toiling like slaves, without any social protection.”

Tihipko believes that, by increasing wages and achieving a degree of transparency in the payroll procedures, it is possible to pave the way for tomorrow’s higher pensions, on a fair basis.

Tihipko told journalists that the work on the Cabinet’s three bills would take another month.