# Are there any general rules that can be used to assess the consequences of a significant minimum wage increase in a country's economy?

Quite recently the EU Parliament discussed upon a new draft EU law that will ensure a minimum level of wage protection in all member states.

The minimum relative to average wages of full-time workers table indicates that there is quite a big difference between EU states when it comes to the minimum to average wage ratio, so EU law would have a bigger impact for some states when compared to others.

This article provides some insight for the pros and cons of raising the minimum wages in the US, but the information is very general, not tight to particular economical context factors.

To narrow down my question I will consider the specific case of Romania (Eastern European state within the EU):

• this article specifies that for Romania's case the minimum gross wage should increase from about 2500 RON to 3500 RON (~40% increase)
• this article mentions that a minimum wage increase would lead to a positive outcome (and it did) under certain circumstances:

The main finding is that the positive effects prevail when the starting level of increase in the minimum wage is very low and the economy is in a negative output gap. Evidence shows that employment has increased, mainly at the minimum wage level, therefore making a shift toward a more balanced wage distribution. This measure might have contributed to a decrease of the shadow economy and a decrease in the share of people at risk of poverty. The impact on inflation was very limited, and the impact on the public budget was positive. Moreover, firms' profits were not affected, as the negative impact of the measure on unit labor costs and exports was limited.

My assumption is that the outcome of significantly increasing the minimum wage is tied to the economical context, but I cannot find more details about it.

Are there any general rules that can be used to assess the consequences of a significant minimum wage increase in a country's economy?

• If you observe the discussions where increases in minimal wage were planned, you will usually find professional economists who argue that it will be mostly beneficial and others who will argue that it will be mostly detrimental. Often, even after an increase has happened you will still see arguments that it either helped or hurt the ecomony as a whole. So it is very complicated and hard to predict. Nov 28 '21 at 19:57

The only few soft general rules when it comes to minimum wages.

1. The higher they get relative to median wage in the economy the higher the probability the utility cost of minimum wages imposed by higher prices for consumers and higher unemployment outweigh the benefits.

This is already what the source you found said:

The main finding is that the positive effects prevail when the starting level of increase in the minimum wage is very low and the economy is in a negative output gap.

1. The more elastic demand for labor is (e.g. this typically occurs when labor can be substituted for by use of capital etc.) the more negative effects minimum wage will have on employment (e.g. see discussion in Borjas Labor Economics ch 3).

2. The more perfect the market is the more negative effect minimum wage will have. This is because minimum wage can be shown to have virtually no negative effect if there is monopoly or monopsony or just generally non-trivial market power of the producer on the market (either goods market or factor market). In that case market power may create quasi rents - a situation where firm gets some pure economic profit which provides larger than necessary reward for firm owners.

I think this point is best to illustrate with example. Suppose, we have some firm with market power (meaning it can sell its product above marginal costs). Suppose that the only source of cost of this company are wages and it currently pays wages \$20 and sells its product for \$40. Meaning it has net economic profit of \$20 (please don't confuse economic profit with accounting profit - economic profit is not the profit firm reports on profit and loss statement and pays taxes from). Now if there is \$20 economic profit, that means that the firm earns \$20 more than necessary for it to produce this product and supply it to market. This would be called quasi-rent (or Marshallian rent) please don't confuse it with prue economic ren't which would occur with windfall profits. Now as explained previously firm will happily operate whether it get's this quasi-rent or not, so from societal perspective there is no reason to allocate this quasi-rent to the firm. If society implements minimum wage that raises wages from \$20 to \$40 in the example above, the firm would still supply the same amount of products and kept the same amount of employees. Although point 1 would kick in here at minimum wage that would push wages above \$40.

3. The more you care about minority groups the less you would want to increase minimum wages. Now this rule applies only to an extent you believe minorities should get special treatment to offset the fact that they are historically marginalized. If you do not care about this you can skip this point, but nowadays it is fashionable to care about diversity and inclusion, so I thought it might be relevant to mention it.

Research shows that minimum wage has much higher negative impact on marginalized groups (see Garry Becker, 1957; Williamsa 2011). This is because asking for lower wage than majority is a natural way how a minority can offset negative effect on their employment from stereotypes or racism etc.

The above being said these are all very soft general rules. It is much better to in each case empirically examine parameters of the market.

In fact, all of the above general rules need at least some (even though not necessary rigorous) empirical examination, since its hard to know how many substitutes there are for labor, or whether there are quasi-rents (you can't just say that because firms report profit there are quasi rents since firms report accounting profit not economic one etc).

In addition, the general rules above won't really allow you to put numbers on those effects. Just generally it can be said that typically if demand for labor is elastic the negative effects will be larger, but you can't know how much, which is always relevant. Lowering employment by 1%, while increasing wages by 5% and increasing prices by 6% is completely different scenario from lowering employment by 10% while increasing wages by 5% and increasing prices by 30%.

As a result, for anything else than just a pure back of the envelope calculation, it would be best to perform or commission an empirical analysis of the industry where you want to implement minimum wages, to see what are the expected effects of minimum wage on that particular industry. Probably post-implementation you would still want to do some re-evaluation because it is hard to model general equilibrium effects so you would want to double check your early estimates against actually observed effects.