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15.02.2019 / The balance between the basic need criteria and the minimum wage is broken

The basic need criteria for people is set at 143 AZN in Azerbaijan. This figure is determined in accordance with the law (the Law on the Level of Need Criteria in Azerbaijan in 2019) adopted on 30 November 2018. How is this figure, which seems small from the first sight, determined?

The level of basic need criteria is determined together with the state budget every year. According to the Law on Subsistence Level, the basic need criteria is adopted in order to determine the targeted state social assistance based on the subsistence level of the main socio-demographic groups in the population. According to Article 1.0.2 of that law, the subsistence level is a social norm consisting of the sum total cost of minimum consumption basket and mandatory payments. Thus, the most important factor in the adoption of the need criteria and subsistence level is this consumption basket.

What is consumption basket and how is it calculated?

According to Article 1.0.1 of the Law on Subsistence Level, the consumption basket is a sum total cost of food, non-food products, and services necessary to maintain a minimum level of health and life activity, as determined by scientific norms. Article 3 of the Law enumerates the items within the consumption basket. This basket is formed by a minimum amount of food products, minimum amount of non-food products used personally or by family (clothes, shoes, stationery, household, cultural-domestic, sanitary tools, medicine etc.), and the minimum total sum cost of services (housing-communal, transportation, communication, domestic, education, cultural-educational, healthcare-leisure services, etc.). The prices of these products and services are determined by average market prices.

One need not be an economist to plainly see that this amount is insufficient to cover the monthly costs of a family. It is evident that the calculation of need criteria is based on subjective interpretations, not objective calculations. These calculations are not based on necessary products, but subjective considerations. Besides the incorrect application of the law, indicators applied in determining need criteria and subsistence levels are obsolete. For example, internet expenses are calculated in accordance with the old lifestyle – when the monthly internet bill was based on 1 hour of internet use per day. This means that it is necessary to reevaluate these indicators and set new values for the consumption basket that are more in line with today’s needs.

Along with that, 3 billion AZN of the total 24 billion AZN national budget is allocated to defense in the 2019 state budget. Some MPs explain away the stark imbalance between the low need criteria and the exorbitant defense expenses by stating that it would impossible to increase basic need criteria in a war situation, whereas the amount of minimum consumption basket shall not be connected to the general policy of the state. The Republic of Azerbaijan must do more to ensure everyone with adequate living conditions for everyone, and low-income families must not be deprived of social support. This is required by the state’s international obligations, as well.

Minimum wage and basic need criteria

One of the interesting features of our national experience is that the current need criteria are 37 AZN less than the subsistence level in 2019 (subsistence level is 180 AZN, need criteria is 143 AZN). This is completely unacceptable, both in terms of international practice and national legislation. According to Article 5.1 of the Law on Subsistence Level, “subsistence level determined in the country … constitutes the basis for determining the need criteria for the purpose of determining targeted state social assistance”. If the subsistence level plays the main role in the determination of the need criteria, then the need criteria cannot logically be lower than the subsistence level. Thus, the calculations for subsistence level and the need criteria being calculated at 180 AZN and 143 AZN, respectively, constitute a violation of the law.

We observed a similar situation in connection with the minimum wage, up to 8 February 2019. The minimum wage for 2019 was set at 130 AZN, which is not only lower than the subsistence level but also need criteria - by 13 AZN. The presidential decree on The Increase of the Minimum Wage from February 8 increased the minimum wage by 50 AZN, to 180 AZN. The increase has been in force since 1 March 2019. Since it is equal to the subsistence level, at first sight, this sum might seem reasonable, but it is necessary to remember that there are many families in Azerbaijan that are much more in need of social support than a set minimum wage, and such families receive social support based on the 143 AZN need criteria. From a legal perspective, this is a positive step by the government; however, the 37 AZN difference between the need criteria and the minimum wage/subsistence level must also be taken into consideration. Of course, questions remain as to the actual purchasing power of even the increased minimum wage in current market prices and expected inflation.

International standards for need criteria

According to the International Labour Organization Minimum Wage Policy Guide, trusted statistical figures assisting the states should be used when determining the subsistence level. In the Republic of Azerbaijan, contrary to this, the need criteria is based on official statistics, and alternative statistics are not taken into consideration. According to those official statistics, inflation has held at a stable 12% for years.

Along with that, Recommendation #135 from the 1985 International Conference of Labour Statisticians emphasizes the importance of agreement between the government and various social welfare partners in regards to objective criteria. When determining need criteria, the International Labour Organizations considered it necessary to take healthcare, children’s education expenses, and social life expenses into consideration, along with food and housing needs. One of the indexes recommended in international practice is the Consumer Price Index. This index takes changes in the price of products and services paid for by consumers within a certain period of time into consideration. Some countries calculate this index based on the poorest segment of society, which allows them to regulate minimum wage by monitoring price increases of food products regularly used by low-income families.

The international practice also demonstrates that it is better to calculate need criteria based on a projected rate of inflation, instead of past inflation. In cases where the inflation rate ends up being lower or higher than the predicted rate, it is then possible to compensate for the difference with suitable regulations.

When we look through the lens of international standards at regulations related to minimum wage, subsistence level and need criteria in Azerbaijan, we can see that the existing practices are lagging significantly behind the rest of the world. In order to eliminate backwardness and bring social assistance up to a proportionate level commensurate with market prices, the validity of the statistics used to create these figures must be questioned. Alternative reports and scholarly research must be consulted; along with that, the composition of the consumption basket must be re-evaluated, and products and services adequate to the daily needs of a modern lifestyle shall be considered. In order to eliminate the difference between the ever-increasing market prices and the need criteria, it is necessary to use calculation methods with the capability to regularly adapt to the consumer price index.