# **I. Motivation**

**Minimum wages are an essential component of a country's social protection system, aiming to protect vulnerable workers; yet, there are risks associated with poor minimum wage design.** According to the International Labor Organization (2012), minimum wage is “the salary which constitutes the floor of the wage structure with the objective of protecting workers who occupy the lowest position in wage distribution”. Minimum wage laws are potentially useful for protecting workers against unfair low pay and reducing wage inequality and working poverty, but they may also lead to higher rates of unemployment, especially among unskilled workers. The empirical evidence on the effect of minimum wages on employment is mixed and policy needs to strike a fine balance between protecting workers and ensuring that employment effects are not too large. There is evidence to suggest that this popular policy instrument might be ineffective in targeting the poor in countries with high unemployment or high levels of informal employment, primarily because the poor are more likely to be unemployed or employed in the informal sector and therefore not covered by labor market regulations. In such cases, minimum wage policy can benefit low-wage workers, but not necessarily low-income families.

**Kosovo introduced a legally binding minimum wage in 2011, and the ratio of the minimum wage to the median wage was similar to the level observed in most EU countries but surpassed that recommended for countries with high unemployment among young and low-skilled workers - like Kosovo.** Minimum wage setting is currently regulated in an administrative instruction that was amended in December 2017.<sup>2</sup> The nominal minimum wage in Kosovo has not grown consistently with inflation, but in relative terms compared to median wages, the level is close to other EU countries. Currently, the monthly minimum wage in Kosovo is 130 euros for employed individuals aged 15-34, and 170 euros for employed individuals aged 35-64. This minimum wage applies for full-time employment, defined as 174 hours per month.<sup>3</sup> This amount has not changed since 2011 and has not grown with the inflation rate. Also, there is no variation in minimum wage across regions, despite geographic price differences. According to the official statistics of EUROSTAT, Kosovo and Albania report the lowest minimum wages in Eastern Europe.<sup>4</sup> Figure 1 Panel a shows the evolution of the minimum to the median wage ratio in Kosovo between 2012 and 2018.  The ratio of the minimum wage to the median wage in Kosovo is slightly lower than the level observed in most EU countries (Figure 1 Panel b) and constituted 0.38 in 2018 (based on Labor Force Survey estimates). The ratio of the minimum wage to the median wage is a common proxy used to measure the restrictiveness of minimum wages (ILO, 2012). The review of practices across countries by the ILO indicates that countries that use this indicator typically calculate the minimum wage as 50-60 percent of the median wage. However, according to Rutkowski (2003), this ratio should not surpass one-third in countries with high unemployment among young and low-skilled workers.

> 2 Source: <mark>International Monetary Fund, 2016.</mark>

> 3 For part-time employment (fewer than 174 hours per month), a minimum hourly wage should be applied. This is 0.75 euro per hour for employed individuals aged 15-34, and 0.98 for employed individuals aged 35-64.

> 4 In 2019, average monthly minimum wages in Eastern Europe were: 886 euros in Slovenia, 505 euros in Croatia, 331 euros in Montenegro, 343 euros in Serbia, and 210 euros in Albania.

4