Tax, as a Social Policy Instrument

Economic Policy Tools to Increase Net Wage Share During a Crisis
The Transition to a Wage-led Growth Model in Hungary

László György
Assistant Professor, Budapest University of Technology and Economics, Department of Finance and Accounting,
Chief Economist, Századvég Gazdaságkutató Zrt.

Dániel Oláh
Macroeconomic Analyst,
Ministry for National Economy

Published in: Public Finance Quarterly 2017/2 (p. 150-170.)

SUMMARY: Labour has been acquiring a decreasing share of aggregate income since the eighties, despite the fact that its productivity has been increasing continuously. The 52.7 per cent average wage share of the Visegrád countries in 2016 is considerably lower than the 63.3 per cent EU average. As for Hungary, a 6.8 percentage point drop was recorded between 1995 and 2016, projected for the whole of the economy, which is considerable compared to the Central European average. Current literature suggests that the bargaining power of labour was undermined by technological innovations, economic globalisation and the weakening of trade unions. Hungarian economic policy took the former two factors as given and intended to break the downward trend by active labour market policies, pro-labour tax policies and the increase of the minimum wage, in other words through redistribution from capital incomes to labour incomes. The specific surtaxes levied on oligopolistic markets and on the beneficiaries of previous decades, as well as savings on public debt interest payments contributed to the creation of public employment programmes, the increase of family tax allowance and the reduction of personal income tax to a 15 per cent flat rate. These policies have influenced wage shares, which has been reflected in the almost 2 percentage point increase of wage shares from 2015 to 2016 according to Eurostat and Ameco data. If we consider the ratio of net real wage and real GDP, then the increase was larger, 5.05 percentage points between 2010 and 2016 or 6.15 percentage points when the family tax allowances are also considered. Hungarian crisis management is part of a new, post-Keynesian, long-term growth strategy, which is based on wage convergence instead of the previous debt-led growth. In line with scientific results, this strategy considers real wages as the primary factor catalysing long-term, sustainable economic growth through the increase of demand.

KEYWORDS: wage share, labour share, functional income distribution, bargaining power

E25, J30, D33

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