Poland wants to boost its minimum wage by 20% — and it’s got economists worried

Poland’s government has proposed a record rise in the national minimum wage of more than 23%, a move economists are worried will exacerbate double-digit inflation.

The ruling Law and Justice (PiS) party announced plans last week to increase the current monthly minimum wage of 3,490 zloty ($859.60) — already set to increase from July 1 — to 4,242 zloty in January 2024 and 4,300 zloty in July 2024.

The government is seeking a third term in office, an unprecedented feat in Poland’s democratic history, as the country heads to the polls this fall. The latest polling gives the PiS a slim lead over the KO (Civic Coalition) fronted by former European Council President Donald Tusk.

In an interview with state-controlled news agency PAP last month, Polish Family and Social Policy Minister Marlena Malag said the minimum wage increase was designed to help people cope with the increased cost of living.

Consumer price inflation in Poland eased in May, but still increased 13% year-on-year. Prices stagnated in month-on-month terms for the first time since Feb. 2022, in part due to a normalization of energy costs.

National Bank of Poland Chairman Adam Glapinski suggested earlier this month that the Monetary Policy Council may look to cut interest rates later this year if price rises slip to single-digit levels.

Rafal Benecki, chief economist at ING Poland, said in a research note last week that this would be “premature.”

“In Poland, the pace of disinflation will visibly slow in the fourth quarter and a further decline to target cannot be taken for granted. Especially in the context of the expected rebound in economic activity and expansionary fiscal policy,” he said.

The government has increased the state budget deficit this year by 24 billion zloty to 92 billion zloty, and plans to increase the country’s Family 500+ child benefit program next year, Benecki noted, along with the sizable increase to the minimum wage.

“In our view, this will translate into continued double-digit growth in average wages in the economy, keeping core inflation elevated,” Benecki said.

“In this context, a possible rate cut at the end of 2023 is more likely to be a one-off move, while the regular monetary easing cycle is likely to start in the third quarter.”

He highlighted that Poland’s core inflation picture remains the least favorable in the Central and Eastern Europe (CEE) region, while developed market central banks have struck a hawkish tone, suggesting that they see upside risks to inflation.

“In our view, to bring inflation down to the target requires a decline in the wage growth rate below 5% YoY and a paradigm shift in economic policy, i.e. less consumption and more investment,” Benecki said.

“The recent fiscal loosening raises concerns about whether the favourable GDP composition seen in the first quarter will continue in the following quarters.”

Further loosening a concern

Polish corporate sector wage growth declined to an annual 12.1% in May, but remains a worry for economists as far as the medium-term inflation outlook is concerned.

What’s more, the PiS is expected to further loosen the fiscal purse strings ahead of election crunch time.

“With the labour market still very tight and further pre-election fiscal stimulus likely to be announced in the coming months, the risks are skewed to wage and inflation pressures proving even more persistent than we currently envisage,” said Nicholas Farr, emerging Europe economist at Capital Economics.

He highlighted that given a “notable increase” in the number of workers that receive minimum wage in Poland in recent years, the impact of the latest increase is likely to be “meaningful.”

“Based on estimates that around 3 million workers receive minimum wage, a back of the envelope calculation would suggest that the increase could add around 4%-pts to wage growth next year (relative to if the minimum wage was held constant),” Farr said in a research note last week.

“That said, the actual impact could be even larger since other state benefits are also tied to the minimum wage, and the increase is likely to mean that other employees (i.e those who are not on the minimum wage) will demand larger pay rises too.”

The new policy proposals are “even more worrying” with wages still growing in double-digit annual percentages and unemployment remaining near a record low, Farr noted.

“The upshot is that we have become more concerned that wage and price pressures may prove stickier than we expect over the coming quarters, and the risks to our already above consensus forecast for interest rates to end 2024 at 5.50% (from 6.75% now) seem tilted to the upside.”