Abstract
The labour market performance of the Western Balkan region lags far behind the EU average. Although a good part of that lag can be explained by differences in GDP per capita and in the overall level of economic development, the rest can mostly be attributed to their suboptimal institutional configuration. We identify the labour taxation system as one of the most critical institutions and also as a field where most progress can be made. The taxation of labour income in the Western Balkans is skewed towards relatively high social security contributions, combined with a lower and relatively flat personal income tax. Low wage earners are particularly disadvantaged in the formal labour market in terms of their low net take home pay and the relatively high cost of hiring, with respect to medium or high wage earners. The implicit tax rate on labour (that is, the effective average labour tax burden) in Montenegro, Serbia and Bosnia and Herzegovina is among the highest in Europe. A major reform of the entire system of labour taxation and social insurance appears to be the most promising avenue for the revitalisation of regional labour markets.
Parts of this chapter are based on authors’ contribution to a publication of the World Bank and The Vienna Institute for International Economic Studies (WIIW) “Western Balkans Labour Market Trends 2019—Special topic: Labour costs, labour taxes and low-wage earners in the Western Balkans”. We acknowledge the financial assistance of the World Bank and are grateful to Stefanie Brodmann who led the project for her consent to publish some of our results in this chapter. Responsibility for the contents and information in the chapter rests solely with the authors.
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Notes
- 1.
LFS data, National statistical offices.
- 2.
From 2012 instead of 2010.
- 3.
Eurostat.
- 4.
Ibid.
- 5.
- 6.
LFS data, National statistical offices.
- 7.
SEE Jobs Gateway Database available at: https://data.wiiw.ac.at/seejobsgateway-q-24700d30d110ea20eff4481b0.html.
- 8.
Montenegro also has at least two marginal tax rates. Workers that have wages over 750 EUR are obliged to pay relatively more (11% vs 9%). However, a higher marginal tax rate was introduced as a crisis measure so it can be considered temporary (and it was indeed withdrawn in 2020). Another distinctive feature of labour taxation in Montenegro is the existence of surtax. The taxable base for surtax is personal income tax, while the surtax rate varies from 10 to 15%, depending on the region, and is specifically earmarked to provide revenue for local governments (i.e. surtax rate in Budva is 10%, 15% in Podgorica and Cetinje and 13% in other regions).
- 9.
- 10.
Kaitz index is defined as the ratio of the minimum wage to the mean or median wage.
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Aleksić, D., Arandarenko, M. (2022). A Low-Wage, High-Tax Trap in the Western Balkans. In: Bartlett, W., Uvalić, M. (eds) Towards Economic Inclusion in the Western Balkans. New Perspectives on South-East Europe. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-06112-7_2
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