6:20 AM Sunday, March 25, 2018
Ukraine Fights Labor Drain With Higher Wages
Higher wages push up prices and slow growth
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By Vera Zimmerman

With the introduction of the visa-free regime with the European Union, Ukrainians are pouring into neighboring countries in search of better economic opportunities. Poland, as one of the main points of destination, registers a million and a half Ukrainian workers.

Ukrainian emigrants are welcome in Europe because they help European countries address their own demographic crisis. But it becomes ever more challenging for Ukraine’s government to win back its depleting workforce and encourage people to stay.

In a survey conducted in December by the Kyiv International Institute of Sociology, the percentage of Ukrainians who said they plan to work this year in the EU was 27%. In real terms, this would be 10 million people.

Do flowers on March 8 make up for one year's low pay? Labor migrants to Poland say no. (UNIAN/Furyk Nazar)

The main driver attracting Ukrainians to Europe is higher pay. Indeed, average monthly salaries back home are the lowest among EU members and other European countries.

For comparison, in Poland the average monthly salary is nearly $1,350 – more than four times the $320 earned in Ukraine.

This wasn’t the case back in 2013, when the average monthly salary in Ukraine was nearly $450 (at the old exchange rate). But due to war, high inflation, and devaluation of the hryvnia, Ukrainian salaries lost purchasing power.

Ukraine Tries to Catch Up

Ukraine’s government has been raising the minimum wage and government salaries.

Last year, it doubled the minimum wage. This year, it raised it again by 16 percent from 3,200 hryvnias (approximately $120) to 3,723 hryvnias (approximately $140).

President Poroshenko, who is up for re-election next year, wants to increase it even further to 4,100 hryvnias (approximately $150) by the end of the second quarter this year. The government also promised to raise the average monthly salary to 10,000 hryvnias (about $370) this year from its current level of 8,777 hryvnias (around $320).

Even after all the hikes, real salaries adjusted for inflation are still 14.7 percent behind the 2013 level, according to some estimates. Economist Olexandr Okhrimenko believes they won’t reach the 2013 level of $450 until 2023.

Many economists ponder how the government can afford this given the country’s slow economic growth.

The government claims that the move isn’t artificial, but stimulated by economic development. Last year, Ukraine’s growth was around 2.1 percent of GDP. It is projected to grow 3.23.5 percent this year. Economists say that this level of GDP growth still doesn’t allow for increasing the minimum wage.

According to Ukrainian Institute For the Future, to generate a higher economic growth rate and income growth, Ukraine needs to more than double its foreign direct investment, or FDI. Last year, the country attracted $2.3 billion. But to achieve the desired 5 to 7% GDP growth, this figure should be $15 to $20 billion annually. Attracting more FDI remains one of the main challenges since investors see a slow progress in combating corruption and are afraid to take risks.

Wages Go Up Before Elections

Critics call a rush to increase wages economic populism, given that the presidential and parliamentary elections are next year. Wage hikes are a tactic to impress the electorate and boost the popular ratings.

Although industrial output in Ukraine was reported to have grown by 3.6 percent in January 2018 compared to a 0.1 percent drop observed in 2017, small and medium-sized businesses aren’t booming enough to create new jobs and raise salaries. The costs employers bear from the increased minimum wages are shifted to consumers through higher prices. Year over year, February inflation was 14 percent.

The main concern is that a bump up of the minimum wage would lead to higher inflation canceling out any tangible wage increase.

Economists believe the president’s initiative to raise the minimum wage is tantamount to printing more money, which only means more inflation. The government rebuts the allegation and says that it will get the money from budgetary redistribution and keep inflation under control.

Inflation to Stay Double Digit This Year?

The official forecast for inflation, however, isn’t comforting: the National Bank predicts it will remain high this year. Fearing another wave of inflation, Ukrainians are likely to stock up on dollars and euros, which will further devalue the already volatile exchange rates.

Opponents further argue that large increases in the minimum wage could create layoffs, force companies to close, or encourage employers to pay salaries under the table. So far, it hasn’t caused large-scale layoffs. According to Ukraine’s State Statistics Service, the unemployment rate dropped from 10.1 to 8.9 percent last year. According to government statistics, in 2017 Ukrainians spent about 94% of their income on goods and services compared to 91% in 2016 and 90% in 2015.

On the bright side, low wages in Ukraine do have a positive effect as they attract foreign companies to open their businesses in Ukraine. In 2016, Fujikura, a Japanese automotive products company, opened two assembly lines in western Ukraine hiring thousands of Ukrainians.

Minimum Wage Hikes do not Bring Joy

Although wage increases sound like a good thing, Ukrainians aren’t rejoicing.

Income isn’t sufficient to meet basic needs, let alone save for retirement. Many face high energy and food prices and struggle to make ends meet. Last year prices of popular goods outran a growth of wages and the 13.7 percent inflation rate, forcing many to cut down on meat. By the end of this year, prices are predicted to rise by almost 9 percent.

Despite the government’s good intentions, natural growth of Ukrainian salaries is stagnant from slow economic growth, while purchasing power is lost due to inflation. The inconvenient truth is that wage increases require a favorable economic environment, which Ukraine doesn’t have. The reforms needed to create this environment have been incomplete and recently slowed down. But even if implemented, they take time to kick in before Ukrainians will feel real improvement in their standard of living.

Higher wages alone, of course, cannot encourage Ukrainians not to leave. There must be a lift given to the overall standard of living to restore the citizens’ low trust in the government and give the people hope that things are getting better.

Vera Zimmerman, a native of Mariupol, is an independent research analyst, translator, and UkraineAlert contributor for the Atlantic Council. She holds an MA in Political Science from George Mason University. She can be reached at:

Posted March 8, 2018

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