New Methodology for Calculating the Subsistence Minimum: Problems of Theory and Practice

Abstract

In the Russian economy, the living wage indicator has traditionally played an important role, since it serves as the basis for calculating the minimum wage, pensions, and social benefits. For a quarter of a century, the cost of living was calculated as the cost of a consumer basket in current prices and was adjusted once every three months. At the end of last year, a law was unexpectedly passed that equates the cost of living with a fixed share of the median income in the region. At the same time, the poverty line was set significantly below the generally accepted level of half the median income. It is shown that the new measuring instrument of the subsistence minimum characterizes inequality in the low-income half of the population but is unable to measure the level of poverty. Therefore, as a result of the application of the new method, the subsistence minimum will significantly decrease in poor regions and increase in rich regions—consequently, inequality in society will increase. It is also shown that the actual rise in inequality will be accompanied by a formal reduction in poverty in the backward regions due to a decrease in the poverty threshold. Another negative consequence of the new methodology will involve growth in income inequality between regions, since the previous method of calculation guaranteed equal real wages for ordinary workers in different regions.