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UNIONS AND ANALYSTS SAY BONUSES ARE NOT IDEAL

Low-paid to get new state help

LOW INCOME employees may soon start receiving a special annual bonus, a move that the Finance Ministry hopes will motivate employers to create more jobs and the low-skilled unemployed to take them up.The annual Sk2,500 bonus will got to employees on regular work contracts with salaries close to the minimum wage, which for 2009 has been set at Sk8,690 per month. If the Finance Ministry’s proposal survives interdepartmental review and gets enough political support the state would start paying 2009 bonuses from 2010.

LOW INCOME employees may soon start receiving a special annual bonus, a move that the Finance Ministry hopes will motivate employers to create more jobs and the low-skilled unemployed to take them up.
The annual Sk2,500 bonus will got to employees on regular work contracts with salaries close to the minimum wage, which for 2009 has been set at Sk8,690 per month. If the Finance Ministry’s proposal survives interdepartmental review and gets enough political support the state would start paying 2009 bonuses from 2010.

The employment bonus is intended to ease the tax burden on labour, especially for vulnerable low-income groups, according to the Finance Policy Institute at the Finance Ministry, which also hopes the bonus will curb long-term unemployment.

Employees working on a regular labour contract who work a minimum of six months in a given year would be eligible for the bonus, which they could claim at the end of the given tax period.
The Finance Ministry said that the employment bonus is in line with the government’s official programme, which has committed itself to “increase the level of solidarity in the tax system, mainly by gradual elevation of the non-taxable sum of the tax base but also by eventual modification of the tax bonus”.

The bonus has found little sympathy with trade unions who argue that all it does is motivate employees to work for lower salaries, and creates a tool for freezing the minimum wage.
“It is a de facto state social subsidy by which the state wants to motivate people to work for low salaries,” Vladimír Mojš, Vice President of the Slovak Trades Union Confederation (KOZ) told a press conference, as reported by the SITA newswire.

The move would change the philosophy of wages in Slovakia, he added.

While the measure could provide some help to those in the lowest income groups the employment bonus is not the best solution, said analysts.

“Payments from the state are not the ideal solution,” Richard Ďurana of the Institute of Economic and Social Studies (INESS) told The Slovak Spectator. “The ministry is trying to help low-income groups and this measure will partially help, but there is of course a better and more systematic solution, which is cutting payroll taxes [i.e. social insurance and health insurance contributions].”

The Finance Ministry expects the employment bonus to have a positive impact on the labour market and problems such as the relatively high taxes on low incomes as well as the low motivation of people to take up jobs.

However, the ministry also expects the bonus to depress public finance incomes and increase pressure on public administration budgets.

Tax revenues are expected to drop by Sk400 million (€13.28 million) in 2010 if the employment bonus is applied while the year after revenues would dip by Sk139 million (€4.61 million) and in 2012 by Sk66 million (€2.19 million), SITA wrote.

However, the KOZ sees other problems with the unemployment bonus which it regards as more serious.
According to Mojš, the employment bonus is not specific enough in targeting employees, while the impacts on social insurance have not been sufficiently explored.

“The employment bonus puts employees in the social security system at a disadvantage,” Mojš said, as quoted by SITA.

Though the actual income of these employees will increase, the bonus will not be included in the calculation base for social security payments and thus in future it might in fact result in lower pensions and social security payments for those employees than they would have received if their actual salary had increased by the sum of the employment bonus.

The trade unions said they support the employment of disadvantaged people through active labour market policies.

The Finance Ministry defended the employment bonus saying that it is a normal tool used in many countries of the world and is even recommended by the Organisation for Economic Cooperation and Development.

However, INESS’s Ďurana said that instead of the administratively demanding employment bonus, which requires payment of taxes and their subsequent return, cutting the payroll tax burden for low-income jobs would be a more effective tool.

“Employees would immediately notice the effect on their salaries, as opposed to the promise that at the end of the year they would be paid a one-time employment bonus,” Ďurana concluded.
Ďurana is convinced that there is room for a cut in payroll taxes.

“I cannot imagine at what other time, if not at a time of record growth for our economy and our tax incomes, would it be less painful for the state to cut the payroll tax burden on labour and thus help the labour market, mainly low-income families,” Ďurana told The Slovak Spectator.

However, Ďurana also said that such payroll tax cuts should be accompanied by a responsible approach on the part of the government to trim public administration expenses.

Lower incomes for the social security provider Sociálna poisťovňa could be then compensated by transferring the saved money from the state budget, Ďurana added.

As for the low motivation of the long-term unemployed to take up jobs being one of the problems of Slovakia’s labour market, Ďurana said this situation is caused by incorrect tuning of the social benefits system, in combination with the high payroll tax burden and minimum wage since these kill the motivation of low-qualified people to work and also limit employers in creating low-income jobs.

“Briefly, the unemployment trap means there is low financial motivation on the part of the citizen to return to work due to the low or even negative difference between the unemployment benefits and the net income after their return to work,” said Ďurana. “A monthly Sk200 bonus, which moreover will be paid as a one-time payment for a year, is a very small inspiration to take up a job.”

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