Minimum Wage Fixing:Basic Principles and Lessons Learnt

Seminar organised by the International Training Center

Catherine Saget, ILO Integration DepartmentTurin, 14 December 2007

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)

The majority of countries fix a national minimum wage,

while a substantial minority adopt sectoral rates 1

Procedure followed to set minimum wages

0%

10%

20%

30%

40%

50%

60%

70%

National or regionalminimum wage set by

government ortripartite body

Sectoral and/oroccupational minimum

wage

National or regionalminimum wage set by

government ortripartite body

Sectoral and/oroccupational minimum

wage

Government Collective bargaining

Asia Americas Europe World

Social partners are consulted in an overwhelming majority of countries although the degree of consultation varies 1

48%

18%

11%

10%

15%

The governmentdecides alone

The governmentconsults social partnersseparately

The governmentconsults a bi/tripartitebody

A three party committeesets minimum wages

Setting up throughcollective bargaining

Degree of consultation of the social partners

In some countries, youth under 18 or 21/22 are entitled to specific minimum wages (75-90% of the standard rate) 1

Countries Age groups % of standard minimum wageUnited States Under 20 during the first 90 days of

employment and full-time students85%

Belgium 15-21 70 rising 94%

Czech Republic 16-21 80% (under 18); 90% (18-21)

France 16-18 80% (under 17), 90% (17-18)

Ireland Under 18 70%Luxembourg 15-18 75% (15-17); 80% (17-18)

The Netherlands 15-22 From 30% (15) rising to 85% (21-22)

Poland First entrants in the labour market 80% (first year of employment) to 90% (second year)

Slovakia 16-18 75%United Kingdom 15-22 85%

Countries with no specific provisions for youth: Bulgaria, Canada (with exceptions), Estonia, Greece, Hungary, Portugal, Spain

The legislation usually provides for both social and economic criteria to be used to adjust the level of the minimum wage

26%26%16%

35%

14%

51%

32%

61%

0%

10%

20%

30%

40%

50%

60%

70%

Th

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ee

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wo

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Co

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fliv

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/infla

tion

Ge

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wa

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Le

vels

of s

oci

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secu

rity

be

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fits

Eco

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/or

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Ca

pa

city

of

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rise

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Em

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Pro

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ity

Social criteria Economic factors

Criteria used to adjust the minimum wage (in %)

Less than 40% of countries provide for a regular frequency of adjustment

Frequency of adjustment provided for in the legislation (in %)

15%

23%

61%

Annually

Every two or more years

Period not stipulated

Relatively similar countries fix the minimum wage at very different levels

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

Franc

e

Austra

lia

New Zea

land

Irelan

d

Luxe

mbo

urg

Belgium

Hungar

y

United K

ingdom

Nether

lands

Portu

gal

Poland

Canada

Greec

e

Slovak R

epub

lic

Czech

Rep

ublic

Sapin

Turke

y

Japa

n

Korea

United S

tate

s

Mex

ico

2005 1995 2005 OECD average 1995 OECD average

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

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

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

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-the–job training combined with lower minimum wages, subsidized jobs, etc)

If the minimum wage is fixed at an appropriate level, effects on employment are small (cont’d) 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

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)

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

Methodology Results

Methods popular in the 80s -.95

Methods popular in the 90s -.5 (non significant)

Source: Bernstein and Schmitt (1998)

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

The minimum wage may be one element to reduce poverty (cont’d) 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)

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?

Issues for discussion (cont’d) 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?

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