Wage Restructuring and Tax Base Transformation in Albania (2021–2025)

The period 2021–2025 marked a deep structural transformation of Albania’s labour market. The restructuring of wage distribution has brought a strong expansion of the tax base: the share of workers earning the minimum wage or below ALL 40,000 fell from 44% in 2021 to 12.6% in 2025, while the segment above ALL 95,000 rose from 8% to 27.6%. This change reflects a real income redistribution, driven by the minimum wage policy, chain effects of public sector wages and the demographic pressures of emigration. Personal income tax revenues doubled, from ALL 39.3 billion in 2021 to ALL 82.5 billion in 2025, with wage tax rising from ALL 25.3 to ALL 49.4 billion. Fiscal growth has been disproportionate due to progressivity and the bracket creep effect, where the expansion of the effective base generated additional revenues without normative changes.

However, the divergence between wage tax and social contributions is marked: the tax has benefited from progressivity and the high-income segment, while contributions (proportional and capped) have suffered structural limitations, creating medium-term pressure on social insurance schemes. Public policies, such as the minimum wage increase (from ALL 30,000 to ALL 40,000) and public sector rises, have partly formalised low-wage declarations and triggered chain effects in the private sector. Emigration and labour shortages have pushed wages up, but without full alignment with productivity.

The scenarios of the “Formal Employment 2027” package offer strategic directions for addressing structural challenges. The optimistic scenario projects a reduction in social contributions from 27.9% to 23% for wages up to ALL 80,000 and an increase in progressive taxation on real estate, generating real incentives for formalisation and additional net revenues of up to ALL 12–15 billion by 2030. This scenario could increase formal employment in labour-intensive sectors by 4–6%, including youth, women and vulnerable communities, and strengthen the sustainability of pension schemes.

The baseline scenario, without structural intervention, projects a continuation of the current trend: moderate growth in formal employment, stabilisation of informality around 30%, and slow growth of social contributions, deepening the divergence between social revenues and expenditure. The negative scenario highlights the risk of informality returning above 35% due to the high labour burden, weakening the tax base and jeopardising the attainment of European integration objectives.

Strategic proposals aim at: (a) a review of tax thresholds and contribution ceilings to preserve progressivity and formalisation incentives, (b) active policies for productivity enhancement and labour market digitalisation, (c) stronger links between contributions and social benefits for transparency and fairness, (d) a proactive approach against emigration, and (e) smart fiscal administration using data and business partnership.

The labour market transformation is real and has brought fiscal benefits, but to ensure these benefits are sustainable and in line with European standards, the transition from cyclical expansion of the tax base to structural growth in formalisation and productivity is necessary. The implementation of a National Action Plan for Formal Employment and Fiscal Convergence 2027–2030, with measurable targets and independent monitoring mechanisms, is key to a modern, inclusive and sustainable labour market, transforming demographic and fiscal challenges into opportunities for European development.