Overall, the anticipated effect of these alternative scenarios is not significant in the long run because the share of the affected population is very low given low employment rates and low share of minimum wage workers among the employed population; and also because the decrease in earnings due to job losses is predicted to be of similar size to the increase in earnings due to higher wages.

**An outbreak of the coronavirus disease (COVID-19) has been spreading rapidly across the world since December 2019** , **and measures to protect lives have been adversely affecting labor markets.** Restrictions on movement and social distancing have affected labor supply and demand, transport and travel in unprecedented ways. Whole sectors of national economies have been shut down—restaurants, hotels, nonessential retail trade, tourism, transport, and much manufacturing. Despite government support packages, businesses throughout the economies have been suffering losses that threaten their operations and solvency. The most affected are small and medium-sized firms and informal businesses. The impact on incomegenerating activities is especially harsh for unprotected workers and the most vulnerable groups in the informal economy (World Bank, 2020a).

**The COVID-19 pandemic poses a serious social and economic challenge to Kosovo and now more than ever it is important for the government to ensure that possible work disincentive effects of an excessively high or undifferentiated minimum wage policy are carefully assessed, in addition to protecting or mitigating impacts on the most affected groups.** Before the pandemic, Kosovo’s economy was projected to grow by 4 percent in 2020. However, because of the pandemic and the associated public health containment measures, economic activity is now expected to contract by 4.5 percent (World Bank, 2020b).<sup>37</sup> The economic downturn arising from the measures to contain the outbreak will not only affect the poor but may also propel large numbers of people into poverty. Experience suggests that unemployment rates can rise sharply during such a global crisis. In Kosovo, the supply and demand shocks to the economy arising from the containment measures adopted by the government are expected to reduce household earnings and increase the already large pool of untapped labor, which may moderate wage pressures further.

# **Several policy recommendations arise from this analysis:**

**First, the analysis shows the importance of producing high-quality labor market data.** The analysis provided in this note is limited to the LFS which does not provide exact wage data. Measurement of wages in the LFS should be improved and complimented by other surveys and administrative data. To monitor labor market response to minimum wages in a robust way, a matched employer-employee panel data set needs to be built (see <mark>Portugal and Cardoso [2006] for a discussion of the potential use of matched employer-employee data for the analysis of the impact of minimum wages). Data limitations not only prevent us from determining a precise estimate of the minimum wage impact but also from estimating the wage distribution. Precise estimates of the median and minimum wages are critical for setting the minimum wage because they allow us to evaluate the extent to which the minimum wage is binding.</mark>

**Second, monitoring the labor market is essential, as well as accurately estimating the wage elasticity of labor demand.** The minimum wage can have different effects depending on the context of the country at a certain point in time. Therefore, in order to set a minimum wage and to impose an adjustment formula, a detailed monitoring of the labor market and the estimation of the key parameters which determine the effect of the minimum wage are needed. In this note, we consider several scenarios based on the estimates of the wage elasticity of labor demand from international evidence, which might not apply for Kosovo. In fact, the economy of Kosovo—characterized by extremely high levels of informality and unemployment—might be not

> 37 These estimates assume that the outbreak affects only the second quarter and economic activity picks up in the second half of 2020. If the epidemic and the corresponding containment measures are prolonged into the third quarter, Kosovo could fall into a deeper recession associated with a contraction of above 10 percent in 2020.

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