Photographer: Waldo Swiegers/Bloomberg

Fastest Wage Growth in EU Unmasks Poorest Nation's Grey Economy

Bulgaria's minimum wage gains feed government coffers
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Bulgarian wages are growing at the fastest pace in the European Union, and it’s not workers who’re benefiting the most.

After decades of companies paying employees officially as little as possible, the government has doubled the minimum wage since the Balkan nation joined the EU in 2007, forcing businesses to raise official salaries. The measures are increasing state revenue from income and payroll taxes as the trading bloc’s poorest member -- measured by per-capita output -- fights the shadow economy estimated to be about a third of the official size.

Government efforts are also boosting earnings overall, with the average monthly wage rising to 868 lev ($495) in June from 802 lev a year earlier. Salary growth adjusted for inflation will be an EU-leading 4.6 percent this year, Hay Group, a Philadelphia-based human resources consultancy, said in a forecast published on its website.

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“If I pay a worker 1,000 lev a month and only declare 200, and the minimum wage becomes 400, I’ll have to declare 400,” said Georgi Angelov, the chief economist at the Open Society Institute in Sofia. “Raising minimum wages and minimum insurance thresholds partly forces the business to bring wages into the light.”

With Bulgaria’s annual gross domestic product per capita at just 45 percent of the EU average, the government has been raising the minimum income to bring living standards closer to those of the bloc’s richer members. The minimum wage rose from just 180 lev in 2007 to 380 lev as of July this year.

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In a 2012 research paper, Friedrich Schneider from the Johannes Kepler University in Linz and Andreas Buehn at the Utrecht University estimated the size of the Bulgarian shadow economy at 35 percent of the official GDP, compared with 9 percent in the U.S. 

Boosting the budget income is among chief reasons behind government efforts to fight the unofficial salary system with higher minimum wages and thresholds for social insurance payments, according to Open Society Institute’s Angelov. “That’s why the government raises them all the time, to collect more revenue,” Angelov said.

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