Dealing with the Gross Problem of the “Semi-Gross Wage”

When we talk about wages in Slovakia, we refer to gross wage. From an economic point of view, however, it is a fictitious value created by accountants. It represents an arbitrarily set point between the two key values: net wage and labor costs.

Today’s gross wage is, in fact, only a “semi-gross wage”. It lacks employer-paid contributions, which creates a hidden contribution burden. And in Slovakia, we have the 3rd largest share of contribution burden of all EU countries, which creates problems on several levels.

At the corporate level, this creates an artificial conflict between employees and employers. The former feel that their net wage is not a sufficient reward for their work, and the latter feel that they are paying high labor costs.

Let’s imagine a situation where an employee with an average wage asks for a wage increase of EUR 100. Even if the employer agrees to do that, our model employee will only receive an additional EUR 70 on the payslip. But, at the same time, the employer has to pay an extra EUR 135 for him in total.

However, problems also arise at the societal level. Politicians can maintain a relatively high tax wedge on labor in Slovakia through hidden contributions paid by employers.

To put it in numbers, the tax and contribution burden in Slovakia equals 42%, while the OECD average is 36%.

Slovakia’s semi-gross wage also contributes to the illusion of a relatively lower minimum wage in comparison with other countries. It creates a misleading image when we try to compare the minimum wage in Slovakia and the minimum wage in Slovenia, since the hidden contribution burden in Slovakia is 35.2%, while in Slovenia it is only 16.7%.

A nice example of this effect is a comparison of the Slovak and Czech minimum wage. Through a prism of the semi-gross wage, it seems that the minimum wage in Slovakia is EUR 23 higher than the Czech one.

But in reality, the labor costs imposed to Slovak employers are EUR 37 higher than in the Czech Republic. And the saddest thing about it is that the Slovak employees will receive only EUR 13 more than the Czech ones. The difference is lost in the setting of the semi-gross wage and in the overall tax wedge on labor.

The solution is to abolish the semi-gross wage and introduce a real gross wage that will include all contributions and taxes on labor paid to state. Lithuania has shown us that this is not a mere fantasy, since they transferred almost all contributions paid by the employer to the gross wage.

The result was not only a clearer and more transparent system, but also the pressure to reduce the overall tax wedge on labor. It eventually dropped from the original 41.2% to 37.8%.

This is something we should and are definitely able to achieve in Slovakia too.

Translated by Ina Sečíková