**The paper is organized as follows.** Section II assesses the adequacy of the minimum wage in Romania and checks whether the statutory minimum wage is high enough so the working poor<sup>11</sup> can afford a basic consumption basket for their families. Section III describes the data and identification of minimum wage workers in the administrative tax database and presents estimates of the share of minimum wage earners among employees and their profiles. Section IV simulates the ex-ante impact of the hypothetical minimum wage increase on the labor market. Lastly, Section V concludes.

# **II. Assessing the Gap between the Statutory Minimum Wage and Living Wages in Romania**

**Setting adequate wages is crucial for ensuring a decent living standard for workers and their families, while also maintaining the viability of the firms that employ them.** To be meaningful, minimum wages have to be set at a level that covers the needs of workers and their families **.** However, wage setting should balance both the needs of workers and economic considerations taken into account for the potential impact of the labor market and other economic indicators. If wages are set solely based on workers and families' needs, they may exceed what many businesses can afford, potentially leading to job losses, increased informality and non-compliance (especially in countries with high informality levels), reduced investment, and diminished export competitiveness. On the other hand, focusing only on economic factors like export competitiveness could result in wages that are too low, leading to high levels of working poverty, stagnant wages,  weak aggregate demand and limited ability to protect workers and their families against low pay or poverty (ILO 2016, ILO 2024). Levels should also be adjusted with inflation to maintain real purchasing power. Yearly adjustments allow for predictability and smooth adjustments, but more frequent adjustments may be required in countries with hyperinflation or accelerating inflation in specific periods. Some countries (e.g., France) allow automatic adjustments when inflation accelerates above a specific threshold. If properly designed and implemented, a minimum wage policy can reduce poverty via the labor income channel as part of a comprehensive povertytargeting strategy, especially considering that previous evidence shows that labor income in Romania is a significant driver of poverty in the country (World Bank, 2023).

**New EU legislation adopted in 2022 establishes that national minimum wages must allow workers to lead a decent life, taking into account the cost of living.** According to the directive, minimum wages are deemed adequate if they are fair in relation to the wage distribution in the relevant Member State and if they provide a decent standard of living for workers based on a full-time employment relationship, tailored to each Member State's socioeconomic conditions. To assess adequacy, a basket of goods and services reflecting real prices to assess a decent living standard is instrumental, among other instruments. Other economic factors, like

> 11 Workers living in households where equivalized yearly disposable income is below 60% of the national household median income level.

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