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Business Intelligence About the minimum wage and other big issues

About the minimum wage and other big issues

by Valoria Business Solutions October 12, 2023


Author: Constantin Măgdălina, Expert Trends and Emerging Technologies

In a country like Romania, where the election cycle brings with it promises to redistribute wealth from the prosperous to the less privileged, the debate on raising the minimum wage is often intense and polarized. Essentially, this is a discussion about representative democracy.

Why? Because nothing gets more votes than taking from the rich and giving to the poor. From the few for the many. After all, democracy privileges representativeness, doesn’t it? But we must carefully analyze the implications of such a measure and remember that the economy and society are more complex than they appear at first glance.

The principle of social redistribution

The idea of raising the minimum wage comes from a legitimate concern to reduce social inequalities and improve the living standards of those on low incomes. In recent years, Romania has followed a trend of increasing the minimum wage, reflecting the concern for improving the standard of living of the population.

From 2021 until now, the minimum wage has been steadily increasing. From approximately 2300 lei monthly to 2550 lei, followed by 3000 lei, and now 3300 lei. However, this measure can create challenges for the business environment, including additional costs, possible staff reductions, and pressures on profitability. It is good to support social equity as well, but what are we doing with economic sustainability?

The problem of poverty taxonomy

Increasing the minimum wage can lead to a problem of categorizing poverty. When you end up taking from the haves to give to the have-nots and needy, you run the risk of creating a granularity of poverty. Although the intention is to support those with low incomes, this approach can lead to a relative categorization of poverty, with different impacts on the population and the economy.

In Romania, poverty is a complex social reality, influenced by several factors: income, education, health and access to essential services. In many cases, an increase in the minimum wage may benefit those on low incomes but have minimal impact on those in extreme poverty.

Thus, inequality can be created within the group of beneficiaries of this policy, in the sense that it ends up providing additional help to those who, compared to the poorest, already have a better standard of living.

The impact on those who generate value

One of the major concerns of such a policy is the impact on those who are actively involved in the creation of economic value. A sudden increase in the minimum wage can create significant costs for businesses and lead to layoffs, decreased competitiveness, and higher prices for consumers to absorb the increase.

Increasing the minimum wage can lead to a decrease in the competitiveness of firms in the international market, especially in industries that rely on lower labor costs. This can cause exports to decrease and, implicitly, impact the economic growth of the country.

Also in an attempt to maintain a fair profit margin for any economic activity, businesses may pass on some of these additional costs to consumers. In short, when the minimum wage is suddenly raised, companies face substantial additional costs, directly affecting employees and production processes.

Given that more than 90% of the Romanian businesses are SMEs, and they are essential for the economy, generating approximately 70% of jobs in the private sector, we can imagine the impact of the new measures.

Promoting sustainable economic growth

Instead of focusing exclusively on redistributing wealth, perhaps we should focus our efforts on promoting healthy economic growth. This means creating favorable conditions for business growth, stimulating investment and facilitating innovation. Such an approach can bring long-term benefits for both employees and employers.

More than focusing on wealth redistribution, the focus must be on creating an enabling environment for business and investment. According to a Bloomberg analysis published this month, between 2010 and 2021 foreign investment almost doubled in Romania, reaching more than 100 billion euros.

It is good to reinforce the trend. Also stimulating innovation, especially in the technological and digital sectors, has a significant impact on economic growth and competitiveness. Examples of countries that have turned to innovation and technology to boost their economy include Estonia, which has developed an advanced digital infrastructure, or Israel, a global center of technological innovation.

Promoting entrepreneurship and the private sector is crucial. Programs and facilities for entrepreneurs help us support the creation and development of local businesses. By supporting SMEs and innovators, new job opportunities can be created and the country's economic growth can be supported.

In conclusion

Raising the minimum wage in Romania, as in other countries, is a complex issue that requires a fine balance between social and economic concerns. While it is important to ensure a better life for those on low incomes, the impact on businesses and the economy as a whole must also be considered. Healthy growth does not mean taking from those who generate economic performance, but creating the conditions for more and more to perform.

It is important that the state should not be an extractive one that prevents its citizens from benefiting from the income of its own activities and discourages performance, but a state that includes, through several support measures, its own citizens in economic relations. Thus it can generate increasing revenues for the budget.

In this way, it stimulates citizens to be more productive and capable of the state and generate self-development for themselves as individuals. A balanced approach and dialogue between all stakeholders is needed to find solutions that work for the whole of society.

About Constantin Magdălina

Constantin Măgdălina has 15 years of professional experience, during which he worked for multinational companies, both in the country and abroad. Constantin has a Master's degree in Marketing and Communication at the Bucharest Academy of Economic Studies. He is LeanSix Sigma and ITIL (IT Information Library®) certified, which facilitates a good understanding of processes and transformations within organizations. On the other hand, the certification obtained from the Chartered Institute of Marketing completes his business expertise. In the more than 4 years of activity within a Big 4 company, he initiated and coordinated studies that analyzed aspects related to the business environment in Romania. Among them are the economic growth forecasts of companies, knowledge management, the buying experience in the era of digital consumers, the use of mobile devices or the customer-centricity of companies in Romania. He is the author of numerous articles on topics related to innovation, streamlining business processes, digital transformation, emerging trends and technologies. He is invited as a speaker at numerous events and business conferences.

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