Minimum Wage Fixing: Basic Principles and Lessons Learnt

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Minimum Wage FixingBasic Principles and Lessons
Learnt

• Seminar organised by the International Training
  Center
• Catherine Saget, ILO Integration Department
• Turin, 14 December 2007

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Outline of the Presentation

• Basic principles of minimum wage fixing (102
  countries www.ilo.org/travdatabase) (1)
• Social and economic effects of the minimum wage
  (2)
• Issues for discussion (3)

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The majority of countries fix a national minimum
wage, while a substantial minority adopt sectoral
rates 1
4
Social partners are consulted in an overwhelming
majority of countries although the degree of
consultation varies 1
Degree of consultation of the social partners
5
In some countries, youth under 18 or 21/22 are
entitled to specific minimum wages (75-90 of the
standard rate) 1
Countries with no specific provisions for youth
Bulgaria, Canada (with exceptions), Estonia,
Greece, Hungary, Portugal, Spain
6
The legislation usually provides for both social
and economic criteria to be used to adjust the
level of the minimum wage
Criteria used to adjust the minimum wage (in )
7
Less than 40 of countries provide for a regular
frequency of adjustment
Frequency of adjustment provided for in the
legislation (in )
8
Relatively similar countries fix the minimum wage
at very different levels
Ratio of minimum wage to median wage in selected
OECD countries, 1995-2005.
NB The median wage is defined as follow 50 of
workers receive a wage below the median wage
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ILO Convention 131 on minimum wage fixing 1

• Once established, minimum wages have the force of
  law
• Most workers should benefit from the protection
  of the minimum wage although exceptions are
  possible
• Social partners should be fully consulted (not
  just informed)
• Criteria of fixing/adjusting the minimum wage
  should include
• Criteria related to the needs of workers and
  their families
• Criteria related to the capacity of firms to pay
• Minimum wages should be adjusted from time to time

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Minimum wage legislation in Ukraine 1

• Set by the Supreme Council on the recommendation
  of the Cabinet of Ministers after consultation of
  the social partners
• Universal coverage
• Six criteria of adjustment
• Annual revision
• Compliance ensured by the Ministry of Labour

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If the minimum wage is fixed at an appropriate
level, effects on employment are small 2

• If the minimum wage is (i) set to protect workers
  at the lower end of the wage distribution and
  (ii) increases in line with consumer prices and
  considering growth, labour productivity, and
  wages, employment effects are small/nil
• However, the employment of marginal groups of
  workers (those with very low-productivity) might
  be negatively affected and other measures could
  be implemented (on-thejob training combined with
  lower minimum wages, subsidized jobs, etc)

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If the minimum wage is fixed at an appropriate
level, effects on employment are small (contd) 2

• Should minimum wage increases be curbed in order
  to protect employment?
• Textile sector in Slovenia
• Poorly-managed small firms in the United Kingdom
• The minimum wage should not be used (e.g. should
  not be lowered) to protect marginal businesses or
  declining industries
• The issue is not that some workers loose their
  jobs because of the minimum wage but whether they
  can find another one or not

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The minimum wage may also have an impact on
informal wages under very specific conditions 2

• Informal workers domestic workers, farm workers,
  and workers in very small-size firms
• The minimum wage can be used as a benchmark by
  informal workers and employers if
• It is set at a low level with respect to informal
  wages (Brazil, Costa Rica)
• It is a widely advertised, simple figure (the
  Punjab)
• There is strong political support from employers
  and the government (Namibia, South Africa)
• No effect on informal wages if it is set at a
  high (and strange) level with multiple rates by
  occupations (Indonesia, many Indian states)

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Good quality monitoring of employment effects is
crucial

• Employment effects vary enormously depending on
  the method of estimation
• For years, it was believed that a 10 rise in the
  minimum wage would lower teenage employment by 1
  before new estimations came
• Impact of a 10 per cent increase in the minimum
  wage on adolescent employment (in ), United
  States, 1954-79

Source Bernstein and Schmitt (1998)
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The minimum wage may be one element to reduce
poverty 2

• Minimum wage fixing should constitute one
  element in a policy designed to overcome poverty
  and to ensure the satisfaction of the needs of
  all workers and their families. (ILO
  Recommendation 135)
• The minimum wage benefits low-paid workers, who
  do not necessarily live in poor households
• However, available evidence shows that it
  benefits more workers living in poor households
  than workers living in rich households
• Minimum wage fixing must be tuned in order to
  minimize employment losses and non-compliance
  while protecting the income of low-paid workers

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The minimum wage may be one element to reduce
poverty (contd) 2

• Many OECD countries have introduced in-work
  benefits in order to boost labour market
  participation of people previously receiving a
  benefit (Make work pay)
• The minimum wage prevents that in-work benefits
  lead to low wages (employers could be tempted to
  lower wages following the introduction of in-work
  benefits)

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Issues for discussion 3

• What information is available on the criteria of
  adjustment and is it circulated?
• How to ensure that the social partners too have
  access to relevant information and make their
  proposals on an informed basis?
• Does negotiation on the minimum wage act as a
  substitute for weak collective bargaining,
  resulting in relatively high minimum wage?

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Issues for discussion (contd) 3

• Is non-compliance with minimum wage regulations
  an issue?
• Is the minimum wage a barrier to employment?
• Does an increase in the minimum wage result in an
  increase in other wages and incomes?

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Conclusion

• The minimum wage can be a powerful policy tool to
  (i) ensure low-paid workers a minimum income
  (ii) prevent exploitation of workers and (iii)
  provide a benchmark for individual employers and
  workers to negotiate wages
• It should be set at a level where it can
  reasonably fulfil these objectives
• Use of the minimum wage for other purposes such
  as substituting the weakness of collective
  bargaining, decreasing unemployment, being the
  main tool to fighting poverty etc. should be
  refrained
• One policy tool cannot be used to achieve too
  many policy objectives