Economic growth widens income gap in Lithuania

DELFI / Kiril Čachovskij

According to Statistics Lithuania, average gross monthly salary in the country was EUR 700.9 in the second quarter of 2015, more than 5 percent above what it was a year before.

However, Jekaterina Rojaka, chief economist at the Lithuanian branch of DNB Bank, says only part of the population have actually benefitted from the growth. She quotes a growing market for second-hand goods as proof that social exclusion is intensifying in the country. At the moment, she says, the gap between high and low earners is at its widest since 2006.

Žygimantas Mauricas, economist with Nordea bank, agrees that not everyone has benefited from economic growth, but adds that they will soon enough.

Second-hand shopping

Statistics Lithuania has released data, showing that retail trade was 5.6 percent bigger in September compared to a year before. Most of the growth went to groceries and tobacco products (17 percent). Trade in IT and communication equipment, cultural and leisure goods, watches, jewellery also grew.

Rojaka notes that, interestingly, there has been a 10-percent hike in second-hand good sales. She adds that moods among different earner groups have been diverging.

“We see a widening gap between the most impoverished and people with highest income. The gap is wider than ever before since 2006,” she tells DELFI.

According to the economist, Lithuania’s growing inequality is also evidenced by reports of the World Bank and Human Development Report, although these are based on older data.

“The smallest gap was during the [2008] crisis, i.e., when everyone was in a very bad situation, but now, when the economy is stabilizing, the gap is growing. Differences have become more pronounced, because lowest-earners have seen virtually no improvement in their predicament,” Rojaka says.

Žygimantas Mauricas, of Nordea bank, agrees that income growth has not penetrated the entire income spectrum. Specialists with skills in short supply have seen their income grow most while retirement pensions have stagnated.

“If we are talking about pensioners who spend more on second-hand clothes, that could be interpreted as growing social exclusion. But that often happens after each economic shock. Initially, income growth is very uneven,” Mauricas says.

Job for government

According to him, in this economy it is the job of the government to ensure a more even income growth and prevent the social gap from becoming too wide.

Tax breaks for low-earners and minimum wage increase are often used measures for that end, he adds.

“These decisions might also help avert emigration of working-age people. It is important for Lithuania to raise income of working people, because in terms of its share in GDP we are among the last in the European Union. Only in Greece and Poland it is smaller,” Mauricas says.

Rojaka agrees that tax breaks for low earners – raising the so-called non-taxable income – is a good idea, although she is sceptical about the effectiveness of raising minimum wage.

“The effects of raising minimum wage are limited, since after taxes, very little turns up in bank accounts of those who make minimum wage,” she says.

She notes, moreover, that these measures will not reverse the trend of widening income gap. While tax breaks and higher minimum wage can help alleviate the consequences, they will not ensure long-term balance in income growth. To achieve that, she says, Lithuania needs lower taxes and fast, but sustained economic growth.

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