IME

Why the minimum wage should not be increased

Автор: Adriana Mladenova / 11.12.2008

Recently statistics was published by Eurostat, where the member countries are compared according to the nominal value of the minimum wage. According to this parameter Bulgaria is taking the last place (see Figure 1), which is frequently used by trade union leaders as an argument in support of the requests to increase the minimum wage in the country. According to the proposed budget for 2009 the minimum wage would increase to 240 levs (from 220 levs). A more in-depth look on the labor market of the Union reveals another interesting relation. Bulgaria is at the first place in the EU according to the parameter "percentage of the population, which is working at the minimum wage" (see Figure 2). Clearly the nominal size of the minimum wage in Bulgaria is the smallest in Europe, but in relative terms is not so. The parameter "percentage of the population at minimum wage" caries more information and should be taken into account when defining the future policy of the country. What is more, in Bulgaria the minimum wage increased by 101% for the period 2003-2008, which is also placing it at the first place in Europe (together with Estonia). As a percentage the smallest increase of the minimum wage is in Holland - with 7%.

It is important to mention that not all countries in the EU have minimum wages. For example, Germany, Italy and Denmark have no unified minimum wage, but the minimum wage of the workers is defined according to the sector where they work, through labor agreements. Bulgaria also is not the traditional case, since de-facto minimum wages exists also by sectors through the introduction of the minimum social security levels for the basic economic activities and groups of professions from 1st of January 2003.  

The possible reasons for the existence of a relatively large number of people in Bulgaria working on the minimum wage could be several:

  • The minimum wages in Bulgaria are relatively high.
  • The low productive workers represent a larger part of the labor force in Bulgaria, compared to other countries. 
  • There is a larger gray labor market and the people do not declare the full amount of their income. This is a direct result from the high taxation of labor in Bulgaria. The social security payments represent still a very large burden for the people and businesses. Something more, the people do not see a direct connection between the payments, which they make to the state social security system and the size of their future pensions and there are no stimuli to declare the full amount of their income (this negative effect disappears with the capital pension system, where the future pensions are directly dependent on the size of the payments, which are made to the individual pension accounts).

Negative effects from the existence of the minimum wage 

Whatever the reasons, the increase of the minimum wage and the minimum social security levels in the country is a detrimental policy, particularly in the conditions of global crisis and the risk of increased unemployment in the country. We would quote several international scientific studies, which evaluate the economic effect of the existence of a minimum wage on the economy. The economists Vedder и Gallaway[1] prove, that the minimum wage does not achieve its objective to reduce poverty and inequality in the incomes due to the negative unforeseen effects and biases, which are created on the labor market.

In their own study during 2006 David Neumark and Olena Nizalova[2] showed some of the negative effects from the minimum wages on the labor market in the USA. By using empirical methods they reached the conclusion that the people who get minimum wages longer (for example: as teenagers) would work less and earn less later on. The minimum wages have negative effect on the education level and qualification of the young.

David Neumark and William Wascher[3] study the effect of the existence of minimum wages in 17 countries from OECD during the period 1975-2000. Through empirical poof they reach the conclusions that the minimum wages lead to higher unemployment among the young. Something more, the effect is stronger in countries where the minimum wages differ significantly at the industry or regional level. The higher the degree of membership into the trade unions and greater restrictions on the labor market increase the effect of the minimum wages on the level of employment.

The minimum wage is not an effective instrument to fight poverty. Every intervention on the market leads to undesirable negative effects, which distort the market forces. For that reason, under the conditions of a global financial crisis a better policy is to reduce the tax and social security payment burden and to increase the payments towards a capital system and to eliminate the minimum social security levels in the country.   

Figure 1: Minimum wages in member countries of EU (€/month) during 2003 and 2008.

Source: Eurostat

Figure 2: Percentage of the workers being paid minimum wage during 2007, (%).

  

Source: Eurostat

* The data is for 2005.

** The data is for 2006.                  



[1] See Dr. Richard K. Vedder and Dr. Lowell E. Gallaway, Does the Minimum Wage Reduce Poverty?, Employment Policies Institute, June 2001

[2] See David Neumark и Olena Nizalova, Minimum Wage Effects in the Longer Run, NBER Working Paper No. 10656, Revised March 2006

[3] See David Neumark and William Wascher, Minimum Wages, Labor Market Institutions, and Youth Employment: A cross-national Analysis, March 2003