Too high a minimum wage can have an adverse effect on the economy

The gross average monthly wage for full-time work in the first quarter of 2016 was 5.3% higher than a year ago. It is the lowest annual rate of growth in the last two years and could be evaluated as a substantial slowdown. This primarily resulted from a slower economic development and, in part, also by a substantially lesser increase in minimum wage than before (by 2.8% this year, compared to 12.5% in 2014 and 2015). We predict that this year, wage growth will be lower than the 6.8% observed in 2014 and 2015.

The increase in the wage bill in recent years has been based ever less on employment growth and, increasingly, on wage growth.  First of all, it reflects the productivity based economic growth when employment rise is rather slow (and will remain such in the coming years as well). Secondly, with unemployment close to its natural level for the past couple of years, in some labour market segments (particularly in the highly qualified groups of employees) a shortage of labour is observed. For instance, one of the dynamic industries currently is computer programming where the number of employees has increased more than thrice and continues to grow rapidly.

Even if the minimum wage (44% of the average wage) does not seem high by European standards, with regard to it, we will not be able to carry out the 'full speed ahead' policies. Just as too intense a workout programme can be harmful for a physically unfit body, too high a minimum wage can harm the economy. The minimum wage unified for the entire Latvian economy can be compared with a unified athletic programme developed for individuals with different level of fitness: for a baby, adolescent and athlete alike. On the one hand, it is obvious that for Riga, the minimum wage may be too low and in the construction business, an increased minimum wage could reduce the proportion of compensation paid under the table. In Latgale, on the other hand, where the minimum wage is more than two thirds of the average wage in the private sector, raising the minimum wage could be harmful (including to the minimum wage recipients themselves). It can bring down the demand for labour (i.e. maintain a high level of employment) and foster the tenacity of the shadow economy.  

From the point of view of economic efficiency, it would only be logical to set a different minimum wage by region and even profession and industry. This solution unfortunately is unattractive from the political point of view, for a lower minimum wage for Latgale would probably be considered discriminatory against the region. Therefore, if there is no other solution than to offer a unified athletic programme for a group of very different individuals, care should be taken to not overtax the weakest member of the group. From now on, it would therefore make sense, when making decisions of further raising the minimum wage, to follow not just the average economic indicators but also individual industries, professions and regions where the existing minimum wage rate is already a burden.  

APA: Krasnopjorovs, O. (2023, 01. dec.). Too high a minimum wage can have an adverse effect on the economy. Taken from https://www.macroeconomics.lv/node/1894
MLA: Krasnopjorovs, Oļegs. "Too high a minimum wage can have an adverse effect on the economy" www.macroeconomics.lv. Tīmeklis. 01.12.2023. <https://www.macroeconomics.lv/node/1894>.

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