Economists Worried as Poland Raises Minimum Wage by 23 Percent

Ahead of a tight election, Poland’s populist government is set to turn on a firehose of wage increases and other spending measures that economists fear will exacerbate the country’s double-digit inflation. 

The country’s ruling Law and Justice (PiS) party, shooting for an unprecedented third term, proposed raising the minimum wage more than 23 percent, from 3,490 zloty ($859.60) to 4,242 zloty in January 2024 and 4,300 zloty in July 2024, CNBC reported. 

PiS holds a slim advantage in recent polls over the center-left KO, or Civic Coalition, led by former European Council President Donald Tusk. Elections will take place in the fall. 

Last month, Family and Social Policy Minister Marlena Malag told reporters the minimum wage increase was designed to help people cope with the increased cost of living.

Inflation last month declined to 12 percent from 14.5 percent in April and 18.4 percent–a 25-year high–in February. 

But economists warned the declines were at risk if the minimum wage hike and other spending policies are enacted. 

“The Polish government’s proposal this week to increase the national minimum wage by another eye-watering 20 percent or so in 2024 means that wage and inflation pressures could prove even more sticky than we expect,” Nicholas Farr, emerging Europe economist at Capital Economics, wrote in a June 13 research note. 

Rafal Benecki, chief economist at ING Poland, agreed.

“In our view, to bring inflation down to the target requires a decline in the wage growth rate below 5 percent” year-on-year, “and a paradigm shift in economic policy, i.e. less consumption and more investment,” Benecki said in a research note last week.

In addition to the coming wage hike, National Bank of Poland Chairman Adam Glapinski has hinted that the bank would consider cutting interest rates if inflation falls to single-digit levels.

Benecki said such a move 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.

In addition to the minimum wage hikes, Poland’s government has more than tripled the national budget deficit this year, and plans to increase a child benefit program next year. 

“With the labor 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,” Farr said.