**explored by Neumark and Wascher, 2006, among others).** This adverse employment impact is attributed to employers potentially substituting minimum wage workers with alternative resources like skilled nonminimum wage workers or capital. Economic theory also posits that heightened wages can lead to higher input costs, reduced production, and decreased labor demand. However, if the labor market operates under monopsonistic competition, a market structure where employers wield influence in determining wages,<sup>6</sup> a minimum wage hike might paradoxically lead to augmented employment. Moreover, the potential ramifications of minimum wages could also hinge upon factors like coverage and adherence to regulations (as highlighted by Posadas and Sanz-de-Galdeano, 2018).

**A potential risk of high minimum wages is an increase in the informality of the economy.** Since undeclared work is, by definition, not reported to authorities, accurately estimating its size is challenging. Due to the availability of information in the EU labor force surveys,<sup>7</sup> Eurostat does not publish statistics on informal employment. Estimates of temporary work and self-employment are available, but they are considered imperfect proxies of informality. Other global databases of informality do not include recent Romania estimates.<sup>89</sup> An EC study used an indirect approach (the Labour Input Method (LIM) to measure the size of the undeclared economy. The results indicate that Romania was one of the countries with the highest share of informal employment in the European Union. In 2013, the share of undeclared work in the private sector's gross value added was 26.2%. This was significantly more than the EU average (16.4%) and the second-highest result in the EU after Poland (27.3%). Romania also stands out when undeclared work is measured in terms of total labor input, with one of the highest shares of the EU (European Commission, 2017). The standard dual economy models of labor market segmentation suggest increasing the minimum wage can drive the least productive workers from the formal sector into the informal one. However, other effects may be observed. Gindling (2018) contends that certain evidence suggests wage hikes in the informal sector due to "lighthouse effects," where employers compete for workers with the formal sector, resulting in higher wages and reduced employment in the informal sector. In contrast, other studies, such as Papps (2012) and Carneiro and Corseuil (2001), have found no discernible impact on wages in the informal sector.

**The empirical literature examining the impact of the minimum wage on employment is extensive, yielding a range of mixed findings; research focused on the least-skilled workers reveals more**

> 6 <mark>Due to constraints binding workers to particular firms, hiring additional workers increases the cost of existing ones. Consequently, market-driven employment may drop below the economically efficient competitive level. Furthermore, in the monopsony model, a minimum wage can occasionally result in increased employment.</mark>

> 7 For example, the EU-LFS allow distinguishing between permanent and temporary contracts. However, it does not allow identification of workers without a contract.

> 8 The World Bank has constructed an informal database of informality covering up to 196 economies over the period 1990-2020, but Romania was not included. https://www.worldbank.org/en/research/brief/informal-economy-database 9 The ILO publishes a database with global statistics on informal employment, but Romania estimates are not available. <u>https://ilostat.ilo.org/topics/informality/#,.</u>

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