metadata: authors: 0: author: Heemskerk,Frank
1: author: Voinea,Liviu
2: author: Cojocaru,Alexandra
count: Romania
docna: 0: docna: Busting the Myth : The Impact of Increasing
            the Minimum Wage : The Experience of Romania
docty: Policy Research Working Paper
subtopic: Inflation,Employment and Unemployment,Labor Standards,Inequality,Labor Markets,Rural Labor Markets
teratopic: Macroeconomics and Economic Growth,Social Protections and Labor,Poverty Reduction,Rural Development
abstracts: cdata!: This paper discusses the impact of a
            gradual, pre-announced significant increase of the minimum
            wage during 2013–16 in Romania. The main finding is that the
            positive effects prevail when the starting level of increase
            in the minimum wage is very low and the economy is in a
            negative output gap. Evidence shows that employment has
            increased, mainly at the minimum wage level, therefore
            making a shift toward a more balanced wage distribution.
            This measure might have contributed to a decrease of the
            shadow economy and a decrease in the share of people at risk
            of poverty. The impact on inflation was very limited, and
            the impact on the public budget was positive. Moreover,
            firms' profits were not affected, as the negative
            impact of the measure on unit labor costs and exports was limited.
geo_reg_key: 517208,517191
repnme: repnme: Busting the Myth : The Impact of Increasing
            the Minimum Wage : The Experience of Romania
display_title: Busting the Myth : The Impact of
            Increasing the Minimum Wage : The Experience of Romania
listing_relative_url: /research/2018/10/30566206/busting-myth-impact-increasing-minimum-wage-experience-romania
topicv3: Labor Markets m1326488 855,Poverty m1326687 695,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Minimum Wages m1327199 1671,Unemployment m1504051 2747
publishtoextweb_dt: 2018-10-31T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,Social Protections and Labor,Poverty Reduction,Rural Development
no_of_pages: 48
author_keys: 0: author_key: 1251337
1: author_key: 917468
model_extractions: WPS8632 Policy Research Working Paper 8632 Busting the Myth: The Impact of Increasing the Minimum Wage The Experience of Romania _Frank Heemskerk Liviu Voinea Alexandra Cojocaru_ Executive Director Office, EDS 19 October 2018
Policy Research Working Paper 8632

# **Abstract**

This paper discusses the impact of a gradual, pre-announced significant increase of the minimum wage during 2013–16 in Romania. The main finding is that the positive effects prevail when the starting level of increase in the minimum wage is very low and the economy is in a negative output gap. Evidence shows that employment has increased, mainly at the minimum wage level, therefore making a shift toward a more balanced wage distribution. This measure might have contributed to a decrease of the shadow economy and a decrease in the share of people at risk of poverty. The impact on inflation was very limited, and the impact on the public budget was positive. Moreover, firms’ profits were not affected, as the negative impact of the measure on unit labor costs and exports was limited.

This paper is a product of the Executive Director Office, EDS 19. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/research. The authors may be contacted at frank.heemskerk.dh@gmail.com or eds19@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Busting the Myth: The Impact of Increasing the Minimum Wage:**

# **The Experience of Romania**<sup>**1**</sup>

_Frank Heemskerk_<sup>_2_</sup> _, Liviu Voinea_<sup>_3_</sup> _, Alexandra Cojocaru_<sup>_4_</sup> JEL codes: D31, E24, E26, I32, J31.

Keywords: minimum wage, wage distribution, labor market, unit labor cost, informal economy.

1 The authors greatly acknowledge the contribution of the members of the Macroeconomic Modelling and Forecasting Department of the National Bank of Romania.

2 Frank Heemskerk is Executive Director (EDS19) of the institutions of the World Bank Group. The views expressed in this paper are those of the authors and do not imply any responsibility of the institutions with which the author is affiliated.

3 Liviu Voinea is Deputy Governor of the National Bank of Romania and Professor, Academy of Economic Studies, Bucharest. The views expressed in this paper do not necessarily represent the position of the National Bank of Romania.

4 Alexandra Cojocaru is Advisor to the Deputy Governor of the National Bank of Romania.
# **1. Introduction**

The prevalent view in the mainstream literature regarding the role of minimum wage and the impact of minimum wage increases has followed for decades the view expressed by Friedman (1962): “it increases poverty and it makes unemployment higher than it would normally be”. The main arguments, as summarized by Agenor (2004), are that the minimum wage represents an “implicit tax on employers in the formal economy, leading to labor reallocation and unemployment”; moreover, “a high minimum wage level raises the relative cost of employing unskilled workers, thus accelerating the substitution of unskilled labor and reducing profits, which in turn reduces firms’ investment capacity”.

The theoretical support for the minimum wage, on the other hand, is rather shy and based on inconclusive empirical analysis on the impact of the minimum wage on unemployment or profits. In the Keynesian paradigm, there is no direct link between wages and unemployment. Keynes’ argument (1936) is that a change in some wages primarily affects the distribution of the aggregate real wage between different labor groups, and not its average amount per unit of employment. Piero Sraffa’s argument (1960) in the academic Cambridge-Cambridge debate on the minimum wage was that a new structure of relative prices would lead to new technology choices of firms, which cannot be predicted.

In recent years, more empirical analysis added to the debate, with mixed results. This paper contributes to this debate, providing evidence from Romania, an emerging economy member of the European Union. While we make no attempt to extrapolate the results for other economies, we are able to bust the myths regarding the negative impact of minimum wage raises, in particular when the starting level is very low and when the economy is in the negative output gap cycle.

Our research is focused on a specific episode of minimum wage increase: the period 2013-2016. This period has three specificities: 1. the minimum wage doubled in only four years; 2. the minimum wage increases were pre-announced and gradual, part of the government’s program; 3. the minimum wage increases in the first years of the above-mentioned period were agreed with the international financial institutions (IMF, World Bank) and the European Commission, as the country was in a financing agreement with them (which ended in the fall of 2015). Therefore, the gradual, pre-announced minimum wage increases were part of the Letter of Intent and Memorandum of Understanding with the IFIs in the period 2013-2014 (June 2013 – Letter of Intent, March 2014 – Letter of Intent). Further minimum wage increases, in particular after 2016, 2
are not the subject of this paper. However, a word of caution is needed, since the minimum wage increases between 2013 and 2016 were large enough to shift the wage distribution (as we will show in this paper). In particular after the negative output gap was closed in 2016, further minimum wage increases need to be carefully tailored.

The remaining of the paper is structured as followed. Section 2 provides a brief literature overview. Sections 3-9 analyze the impact of minimum wage increases on average wage and wage distribution, growth and inflation, employment, shadow economy, firms’ competitiveness, and the general budget. The last section concludes.

3
# **2. Literature review**

There is an extensive body of literature investigating the impact of the minimum wage on the economy. The opinions about its effects are usually seen either as a necessity to prevent exploitation of the low skilled labor and address income inequality, or as an artificially imposed price that creates excess labor supply and hence unemployment.

Most of these studies were conducted especially for the labor markets of advanced economies, such as the United States, the United Kingdom, Germany or Canada. New Zealand and Australia are the pioneers of the minimum wage policy. The literature on the impact of the minimum wage policy has significantly improved in the past years even for developing countries, where labor markets are more heterogeneous and conclusions about the positive and/or negative effects of such measures are even more difficult to be drawn.

Some empirical evidence based on US data suggests that an increase of the minimum wage leads to a decrease in employment. Brown, Gilroy and Kohen (1982) identified large negative effects for teenage workers, and still negative, but much smaller effects for young adult workers. Deere, Murphy, and Welch (1995) found that the 1990-91 increase of minimum wage by 27% reduced employment for all teenagers by 7.3% and for black teenagers by 10%. Burkhauser, Couch, and Wittenberg (2000) documented a decline in employment of 2% to 6% for each 10% increase in the minimum wage. Even the United States Joint Economic Committee surveyed all empirical research on the employment effects of minimum wage available in 1995 and concluded that a 10% increase in the minimum wage reduced teenage employment by 1% to 3%. Later on, these conclusions were shared by Neumark and Wascher (2013), but with a smaller effect for the young workers.

Some other studies did not find any negative effects on employment or even documented slightly positive effects. There is the well-known study by Card and Krueger (1994), based on survey data for New Jersey and Pennsylvania. Michl (2000) and later Allegretto et al. (2011) also confirmed these conclusions.

A World Bank study from 2001 (Maloney et all) provides an empirical model based on the Colombian economy which shows that such a measure can have an important impact on wage distribution in the neighborhood of the minimum wage and that the effect is much stronger in Latin America than in the United States. The results were that the minimum wage policy affects 4
the labor market in a substantial way by increasing rigidities, but it also influences the informal sector, by strong lighthouse effects (the “Efeito Farol”). This last remark was also noted by Neri, Gonzaga and Camargo (2000).

Carpio and Pabon (2014) found that the evidence of the effects of the minimum wage on employment, poverty and inequality is mixed. In some cases, the measure leads to layoffs of low productivity workers, but in some others, the effects were minimal due to “low compliance with the law and because large segments of people work outside the reach of labor law”. They also mention that “moderate changes in the minimum wage level, aligned with key economic variable, can limit the negative impacts and lead to positive impacts from minimum wages” and that when setting minimum wage “it is best to have a clear formula that avoids excessive rigidity (...) and it is easy for all stakeholders to understand and apply”. Using a transparent adjustment process (with a pre-set formula) in the Republic of Korea is found not to have any negative employment effects, since the absence of discretion the policy makers have in setting minimum wages allowed for better planning of future labor costs for the firms.

The literature on the minimum wage policy implies that the impact depends on many aspects, such as the degree of competition in labor and product markets, the methodological evaluations used (Card and Krueger, 1994; Neumark, 2013), the time span, the category of people affected (teens, women), the sectors where the employees work, the magnitude by which the minimum wage increased (de Linde Leonard et all, 2014) or the workers’ and firms’ policy expectations (Pinoli, 2010) and whether or not minimum wages are indexed to inflation (Strain and Brummund 2016; Tilly, 2017).

On the methodological evaluations, Card and Kruger (1994) found that cross sectional studies comparing regions are more likely to have negligible or positive effects of the minimum wage increase on the employment side than the time series studies or the panel data studies. More recently, Neumark et al. (2013) showed however that adding state specific time trends to data will no longer show negative effects on employment. Improvements in this regard have been seen in recent years also for panel data studies, when appropriate controls are put in place.

As for Romania, an IMF study (2016) made a preliminary assessment of the minimum wage increases that started in 2013. The findings were mixed. On the one hand, the study finds that minimum wage increases reduced inequality, narrowed the gap between low and high pay, and boosted consumer spending. On the other hand, the impact on reducing poverty was inconclusive, 5
negative impact on employment of youth and low-skilled could be expected, and firms’ external competitiveness could have been undermined. As for overall employment, “(...) benign impacts of minimum wage hikes on the employment in Romania may be due to the fact that minimum wage hikes emerged from low wage base and growing economy in recent years had helped to absorb the negative impact on employment.” Now we can analyze the minimum wage increase that took place in Romania with the benefit of time and additional data. However, we share the IMF concern expressed in that study that, after a certain minimum wage floor has been reached, further significant minimum wage increases may be counterproductive.

Overall, the academic literature did not reach a unitary consensus regarding the effects of the minimum wage policy on macroeconomic variables, with empirical results varying depending on the specific country-data used, sample and methodology.

Recent studies have tried to focus more on some other implications of the minimum wage. This is also the case for the present paper, which tries to assess a large variety of effects of the minimum wage, having in mind different areas and different models.

6
<!-- Start of picture text --> RON .? preannounced PP.p. 9%, YOY<br>2 16 — — ———- 16<br>1300 : minimum wage<br>~ ar 12 12<br>: adjustments<br>1100 - : 8 8<br>4 4<br>900 ~~ —— ro<br><!-- End of picture text --> <!-- Start of picture text --> : fe) q tT TT LJ LU Di we LJ ! fe)<br>T<br>700 : (oa)cd fa)a +c +a wc Wwa woc woa<br>: oc Oo 09 f09 fo fo fo Oo<br>: N NN NN NN AN<br>500 SATTTATREEIA TTT TAIL ELGAR TATTLE RATE eT 8 3 8 3 8 Ee 8 3<br>COAee eeA NNMMTTee ee oeHNNeeOw| . oe<br>ooooooocococeoc eo Other gross wages increase (contribution)<br>NANNNNNNANNANNANN AN . . on<br>cscs ecsecescszcsecs mam Minimum gross wage increase (contribution)<br>Sesrsrsgsrssrssrse —Average gross wage increase (sec.ax.)<br><!-- End of picture text -->
<!-- Start of picture text --> x<br>c 55 ~ a a ee oo<br>co A 2012 @ 2016<br>= 94<br>v Mean of the indicator 2012 Mean of the indicator 2016<br>2 e ui<br>ie} oe! 1<br>= pear rwe.<br>©% ri1I <<br>D<br>4 BD ee oo ae a a . eee<br>8i patI i if 4<br>£ H I<br>s:I<br>== @ oe « wow © © >loig © © p> LVL TY BY Ye<br>FsgzagozsezveEeseo Y zRSEoO = S&SERww &%ZMSE'C> Elere®tSIT BoSERSs GEB§EMZsavtixza= oe EBOs gfeDD09 2B<br>a Ex gaadg Bigsso erg~ 2g"%"¢w =<br>3 VJ g S Zz 3g<br>= 7 S)<br>= Y<br><!-- End of picture text -->
<!-- Start of picture text --> DCO gn<br>m PPS terms<br>= Euro terms<br>800 ees. kstseCmCmCCC<br>ry<br>\<br>400 i ee ee ee 1|<br>o<br>oe— erYvooe¥Y~co oO c 5S =© oase ocovdoO ec |; &§ —© SF =LY wB@ ==Yi1 oyD— —_w<br>amMreEZPLooD53285 55 SS>Senfoe#2sa fa FREERGS Bale &<br>e®g5goteéza Ke) Oa o50£5sc 9Gge aigclols! Ss 3<br>Y <= 7) a # re cele! a)<br>a=| Os2Y 4 xoO> a<\OoPo WVLY<br>2 N<br>WY O<br><!-- End of picture text -->
<!-- Start of picture text --> 1400 1400<br>1200 1200<br>1000 1000<br>800 800<br>600 600<br>400 400<br>200 200<br>0 0<br>secocemcUccmUCUCcOCUCOOCUCOPMWCUCcCMKPOCUCT VSEVee sz ecocmUCcCOcWmUCOMcmCOrmCOPMCUPCMPWPWCUC!KKKCUCSF<br>Sesecescseseesescsesecscesescs SescesemUCUSTUCUCMUVrCUChUCh)TDUCUDUCUCSGUUCSU<br>BFSo onsesesesesesesSAR H& SF KR SER §&B B ®S csS234H 8SC SSS& $F$ & SESFR EsGB B<br>mowOF te ae He He aHe aH oH ao GV mePe et ae He ae Be ae a ao<br>© Ss eoeoeeoeSeee eae se 2 © oo coc coc cs Boe ese B<br>-¢8 SARR FREER © zecS2R RF RSR SO<br>==<br>1400 1400<br>1200 1200<br>1000 1000<br>800 800<br>600 600<br>400 400<br>200 200<br>0 0<br>soecsckeoeeoeeseseeseceeces Ssoesceoeeocecoceosseeeceeee<br>SoemnaesescescesesescemsmcUCcUTCUCOCUCSBCUCUCSonSanam9a Soa4 ae SSEtoFHBa SESteDRa aSeoeossHtDB HGSOH GF SoRnoscosesescesesecscesaNS(nnztTsosoecscesoecSCUCCSse70m"eeFHa ODORaBA S GASS8sAN<br>MmMmMoooeceesgceoeosée®eonwneseeseesee®s62z4oGo cs 8 Mhnwnesoecsecscsecoeecesosecssggens cocoseesgesee®eose6$<br>£ “<br>f= NM FT H ORK a ZEBvrAN MA FH OK n 8S<br>= =<br><!-- End of picture text -->
<!-- Start of picture text --> 3000<br>m 2012: Min. wage=0.33 Average wage<br>2500 m 2016: Min. wage=0.44 Average wage<br>Wn<br>®<br>> 2000<br>2<br>Q<br>=<br>2 1500<br>fo)<br>—<br>oO<br>2<br>€ 1000<br>=)<br>2<br>500<br>Oo<br><0.33 0.33-0.45 0.45-1.00 1.00-2.00 2.00-3.00 >3.00<br>Ratio of employee's gross wage to average gross wage<br><!-- End of picture text --> <!-- Start of picture text --> “ 2012 “ 2016<br>35 35<br>30 30<br>25 25<br>20 lm Private sector 20 lm Private sector<br>15 m Public sector 45 m Public sector<br>:5<br>0 °<br>= oo lo) Oo fo} Oo Oo fo} fo}<br>fc Fe as 4 AH FH GBR GB B eT eT tts & A<br>= = = S5RBSSSESESESESSR SB<br>e288 28888<br>3 8 8 6 gS2RRSSRER2 SBS<br>© 2 a aA NN MH FT H ORK = » Ss<br>= = : =£<br><!-- End of picture text -->
<!-- Start of picture text --> 1400 100<br>1000 m@ Public. sector 80<br><!-- End of picture text --> <!-- Start of picture text --> 600 40<br>400 :<br>20 | | @ Public sector<br>200 | | TM Private sector<br>0) 0)<br>2012 2016 2012 2016<br><!-- End of picture text -->

<!-- Start of picture text --> 100 : =<br>: preannounced minimum<br>? wage adjustments<br>60 : ——Employees<br>40 : -—Employed persons<br>: except employees<br>20 ?<br>: ——Unemployed persons<br>fe) .<br>DD oO a Nim t+ w wo ~<br>oO a =i odicd a a San | ao<br>0 0 0 0:0 0 0 0 0<br>N N N NN N N N N<br><!-- End of picture text -->
<!-- Start of picture text --> 2<br>oS Oo @ EE T T T T 1<br>= so @ si @ cz HUp<br>Lo @ SK<br>om N -2<br>— 1<br>———<br>5S - @ RO<br>i fo)<br>Ow<br>Qa. v -6 y = -62.536x - 1.3954<br>_— = eu. [0.17] [0.50]<br>GD ac -8 R* = 0.202<br>£&<br>O -10 @ lv<br>@ BG<br>-12<br>fe) 0.03 0.06 0.09 0.12 0.15<br>Change in minimum to avareage wage ratio,<br>2010-2016<br><!-- End of picture text -->
# **4. Impact on economic growth**

After assessing the impact of the increase in the minimum gross wage on average wage (using the economy-wide wage distributions), the impact of the latter on economic growth was determined using a vector autoregressive (VAR) approach (for more technical details, see Annex 1).

The estimated threshold VAR model indicated the existence of an asymmetry related to the economy’s position within the business cycle: the estimated pass-through of average wage increases to economic growth was higher during the periods characterized by excess demand (positive output gap) as opposed to the ones with demand deficit (negative output gap). During the contraction phase of the business cycle, economic agents tend to save more of the extra income in detriment of consumption, in the context of unfavorable employment prospects and, implicitly, uncertain future incomes. The opposite is true during the expansion phase of the business cycle.

Figure 11 shows the distributions of the pass-through coefficients across the two regimes. These are computed as the ratio of the impact impulse response of output to an unexpected average wage shock and the impact impulse response of average wage to the same shock. In the case of the negative output gap regime, average pass-through amounts to about 0.01, meaning that a 10 percentage point increase in average gross wages leads to 0.1 percentage point higher economic growth. The distribution covers a significant range of negative values, suggesting the impact of wage dynamics on economic growth during demand deficit periods is very limited. In the case of the positive output gap, however, the average pass-through coefficient is significantly higher, of about 0.12. Accordingly, a 10 percentage point rise in average wage growth increases economic growth by 1.2 percentage points. In addition, the probability of the pass-through effects to be negative is very low in this case.

14
Negative output gap <!-- Start of picture text --> t<br>—— Density<br>---* Mean i<br>0.02 -0.01 0 001 002 0.03<br><!-- End of picture text --> <!-- Start of picture text --> Positive output gap<br><!-- End of picture text --> <!-- Start of picture text --> t<br>— Density<br>---* Mean<br>0.05 O 005 01 015 02 0.25<br><!-- End of picture text -->
<!-- Start of picture text --> 60 y = 0.0286x + 28.882<br>[0.02]** [0.00]***<br>wo R22-= 0.455 5s<br>a @ cz<br>oO<br>N<br>>= 50 SK<br>= EE. @<br>'S ee PL®@<br>a H<br>S<br>@ wv<br>3S eu<br>SQa @ RO<br>> 40<br>ro)<br><Q<br><!-- End of picture text --> <!-- Start of picture text --> a| @ BG<br>30 a a a |<br>400 500 600 700 800 900 1000<br>Monthly minimum wage, PPS, 2016H2<br><!-- End of picture text -->
<!-- Start of picture text --> 0.5 .<br>68% confidence interval<br>o —Median<br>0.3<br>0.2<br><!-- End of picture text --> <!-- Start of picture text -->
-0.1 -<br>vay \O | ad 10,4) ON (on) —_ N foe) wT ~y \O<br>oS (an) S oS S al _ —_— — _ —_ =<br>(o>) Oo =} oO =} oO (=p) So So oO So So<br>N N N N N N N N N N N N<br><!-- End of picture text -->
Table 3. The average impact of an increase of one percentage point in the average gross wage on inflation, semi-structural model

|**Impact on core inflation**|**Impact on CPI inflation**|
|---|---|
|0.05-0.12|0.03-0.07|

Source: authors, based on NBR estimations Note: The impact on CPI inflation was determined by multiplying the impact on core inflation with the core index weight in the CPI basket.

The results may be counter-intuitive at first sight, as a large increase in minimum wage, over a relatively short time period, has a very small impact on inflation. There are a number of possible explanations for this small impact. First and probably foremost, the whitening of the labor market (the “Efeito Farol”) which means that the same amount of money was exchanged between employers and employees before and after the increase of the minimum wage, but in the latter case more is shown and subject to taxation. This explanation is supported by our finding regarding the impact on the shadow economy. Second, the very low starting point means that people earning the minimum wage probably used some of the higher income to repay their debt or to cover for essential needs for which they should have paid anyway, therefore not creating inflation. Nevertheless, we do not have sufficient data to validate this hypothesis, but it cannot be ruled out. Third, the minimum wage earners may have increased the demand for low-cost, locallyproduced goods and services, some of which are being produced by the companies they work for. Therefore, the relationship between domestic demand and domestic supply is reinforced.

18
<!-- Start of picture text --> 7000 = preannounced ; 2100<br>6800 — Employees (thousands, left) ? minimum wage<br>-- tf diustments<br>Minimum wage (RON, right) ; adjustments<br>| — Ss2800<br>6600 | i - 1500<br>6400 | : - 1200<br><!-- End of picture text -->

<!-- Start of picture text --> 6000 | i - 600<br>5800 ; | 300<br>Oo co) Oo co) co) co) a] Oo = = ais =a =a =a =x<br>Oo co) Oo co) co) Oo co) Oo fo) Oo Oo oO :O oO Oo oO oO<br>N N N N N N N N N N N N : N N N GN N<br><!-- End of picture text -->
suggests that a hike in the minimum wage during a positive output gap period might be correlated with a temporary “cooling down” of the economy. The reverse is true in a period of below potential growth (2011-2016): a minimum wage hike corresponds to a reduction of the positive unemployment rate gap and, accordingly, to a decrease in the size of the slack in the economy (see Figure 15, right).

_Figure 15. Mean of unemployment rate gap during 2004 Q1-2008 Q3 (left) and 2011 Q1-2016 Q4 (right) within a period of three months before/after a minimum wage hike_ <!-- Start of picture text -->
-3 -2 -1 0 1 2 3 -3 -2 -1 0 1 2 3<br>.2 .1<br>.1<br>.05<br>0<br>0<br>mean of unemployment gap -.1 mean of unemployment gap<br>-.2 -.05<br><!-- End of picture text -->

Source: NIS, NBR calculations Note: The time of the minimum wage hike is marked “0” on the x-axis Figure 16 shows similar conclusions for the youth (aged 15-24) unemployment rate gap, for the two periods mentioned above. In this case, given the prevalence of minimum wage contracts among young persons (which have less experience and skills), the effects described above are potentially stronger. In particular, for the negative output gap period between 2011 and 2016, the positive unemployment rate gap diminishes more suddenly and abruptly for youth (see Figure 16, right) than for total unemployment (see Figure 15, right).

_Figure 16. Mean of youth (aged 15-24) unemployment rate gap during 2004 Q1-2008 Q3 (left) and 2011 Q1-2016 Q4 (right) within a period of three months before/after a minimum wage hike_ 20
<!-- Start of picture text -->
-3 -2 -1 0 1 2 3 -3 -2 -1 0 1 2 3<br>.1<br>.6<br>.05<br>.4<br>0<br>-.05 .2<br>-.1 0<br>mean of youth unemployment gap mean of youth unemployment gap<br>-.15 -.2<br><!-- End of picture text -->

Source: NIS, NBR calculations Note: The time of the minimum wage hike is marked “0” on the x-axis Figures 15-16 seem to suggest that a minimum wage hike could be associated with a reduction in inflationary pressures during the positive output gap period (i.e. negative unemployment rate gap shrinks or becomes positive), while having a reflationary effect during the negative output gap episode (i.e. positive unemployment rate gap shrinks or becomes negative). Similar nonlinearities can be observed in the case of the growth rate in the number of employees. In the positive output gap phase of the cycle, a minimum wage hike corresponds to an increase in the growth rate of the number of employees (see Figure 17, left). Conversely, in the negative output gap phase of the cycle, an increase in the minimum wage is associated with a temporary slow-down in the growth rate of the number of employees (see Figure 17, right).

_Figure 17. Mean of the rate of growth in the number of employees in 2004 Q1-2008 Q3 (left) and 2011 Q1-2016 Q4 (right) within a period of three months before/after a minimum wage hike_ <!-- Start of picture text -->
-3 -2 -1 0 1 2 3 -3 -2 -1 0 1 2 3<br>.25<br>.25<br>.2<br>.2<br>.15 .15<br>.1 .1<br>mean growth in no. of employees, p.p. .05 mean growth in no. of employees, p.p. .05<br>0 0<br><!-- End of picture text -->

Source: NIS, NBR calculations Note: The time of the minimum wage hike is marked “0” on the x-axis We continue our employment impact assessment with a sector level analysis. Based on averages during the post-crisis period, we construct two groups of economic sectors. The one with above21
<!-- Start of picture text --> 50%<br>40%<br>30%<br>m 2008<br>20%(e) m 2012<br>10% m 2016<br>0%<br>-o aOi oO= Ss ra[@)'. cc<br>ca<br><!-- End of picture text --> A: Agriculture, forestry and fishing B-C-D-E: Mining and quarrying; manufacturing; electricity, gas, steam and air conditioning production and supply; water supply; sewerage, waste management and decontamination activities F: Construction G-H-I: Wholesale and retail; repair of motor vehicles and motorcycles; transport and storage; hotels and restaurants J: Information and communication K: Financial intermediation and insurance L: Real estate activities M-N: Professional, scientific and technical activities; activities of administrative services and support services O-P-Q: Public administration and defence; social insurance of public sector; education; health and social assistance R-S: Shows, culture and recreation activities; repair of households goods and other services
<!-- Start of picture text --> wo 0-015<br>Son!<br>=)<br>oN<br>NY 0.01 4 N<br>=®@<br>§<br>io) 0.005 Q J E @u «ce<br>£ O _— ;<br>fo)<br>ousco)3-0.005 fg@ -@« R @Fr<br>x D<br>nn<br>&<br><!-- End of picture text --> <!-- Start of picture text --> @c y = 0.0194x - 0.0041<br>& -0.01<br>S [0.02]** [0.05]**<br>O 0.1 0.2 0.3 0.4 0.5<br>Change in share of minimum wage workers, 2012-2016<br><!-- End of picture text -->
<!-- Start of picture text --> 40 1200<br>—Shadow economy (% GDP, left)<br>35 ——Minimum wage (RON, right) 900<br>30 4 ea 600<br>;a -<br>20 0<br>OtoOo oO NO O MO & mnmOo O o n~O Ono0 0 A ATANoA oA mMoA TFToA WY<br>Oo O OO 00 0 0 0 0 0 0 0 0 A O<br>NNNNNNNNNN NNN NN NN<br><!-- End of picture text -->
<!-- Start of picture text --> 0.4 : — 1600<br>: preannounced minimum<br>0.35 a AP > _ 1200<br>0.25.an: . ~400<br>——Cash to M1 ratio - left<br>—Minimum wage (RON) - right<br>0.2 : O<br>TM~ co D oO — N Oo as WM wo TM<br>Oo can} Oo = = = = Sn! = = =<br>fon) oO oO oO oO oO oO oO oO oO oO<br>GN GN GN GN N —N GN GN GN GN GN<br><!-- End of picture text -->
<!-- Start of picture text --> 120<br>100 ><br>SY —,<br>80 ia Ne s<br>65<br>60 56<br>40 - aTAg<br><!-- End of picture text --> <!-- Start of picture text --> 20 =i Compensation per employee (% EU, PPS)<br>=-=—Labour productivity (% EU, PPS)<br>0<br>fo)N [o)~ & Za)[o) <0)oO [o)~ oOco oOD (eo)a 4a adN ~a +a Wwa 0a msa<br>oO () oO oO oO oO oO (>) [) oO oO () (2) oO oO oO<br>N N N —N N N N N N N N N N N N N<br><!-- End of picture text -->
<!-- Start of picture text --> 140 140<br>=—@RO —DE ——FR —IT —@RO ——HU ——CZ ——PL ——SK<br>130 130<br>120 120<br>110 110<br><!-- End of picture text --> <!-- Start of picture text --> 90 90<br>80 80<br>70 70<br>noaaa~ OowoAtAoSwm WwWé6éBba8aRakh aA mM mHBAMs wooaoaaoesgSeg@speageuags& oOo ao MM W ~ hon 00Se © © RE<br>DNAnOdAGKGGKHA000A A THON NON ON ONOONON ON ON DNOAODoOedGhHAGBGAa0Q0a <- | NN N N N N N N 0N<br><!-- End of picture text -->

<!-- Start of picture text --> 15<br>12 =Total<br>9<br>6<br>=<TM-Sectors with above-<br>3 average minimum wage<br>workers share<br>0 =#e=Sectors with below-<br>-3 average minimum wage<br>workers share<br>-6<br>2013 2014 2015 2016 2017<br><!-- End of picture text -->
<!-- Start of picture text --> 25<br>meee<br>. VAN TN<br>5 ?~F_TMMN / My a<br>-10 ’ -—=-RO OOOO<br>-15<br>oO6SN GN8=) oO&N oON8 co)N&§ lo)NBSB Oo8BN oOBsaesAsaasstsN oON oOGN oON oOGN oON 8SoON oON 8oON<br><!-- End of picture text --> <!-- Start of picture text --> 110<br>90 _ —,<br>70 LUN VM -—eEU<br>——— ~~ “ns ee<br>60 TN =r0<br>50<br>NoO roe)oO = Oowo woOo OoTM oOco oODD oOaa oo=o aoN aa!oO s+4 Wwod wo4 TMaH<br>oO oO oO oO Oo oO oO oO oO oO oO oO oO oO oO oO<br>—N N TMN N N N N N N N N N N N N N<br><!-- End of picture text -->
<!-- Start of picture text --> 50 3<br>40 =Total<br>30<br>-TM-Sectors with above-<br><!-- End of picture text --> <!-- Start of picture text --> workers share<br>10<br>ea =t-Sectors with‘ below-<br>0 ss a a | average minimum wage<br>oD O AFA NM tT NH w workers share<br>oo) oO Sa a a So a a Sa<br>So 0G 0G 0 G0 Go GoD Go oO<br>NNNNNNNNN<br><!-- End of picture text -->

<!-- Start of picture text --> :significant minium<br>? wage increases<br>10 : =-©Total<br>: YZ<br>— -TM-Sectors with above-<br>0 N\ _ S-: workersaverage minimumshare wage<br>a =—t-Sectors with below-<br>5 i average minimum wage<br>0 DH OO AN mM + HH LC workers share<br>oO lon) S| - Sal Sa! S| S| Sa!<br>Oo oO lo} oO oO oO oO oO oO<br>N N N N N N N N N<br><!-- End of picture text -->
<!-- Start of picture text --> 6::significant minium<br>: wage increases<br>i —@Total<br>3 :<br>0 ;ALPNS at -TM-Sectorsaverage with minimum above- wage<br>\ i workers share<br>: =tSectors with below-<br>3 : average minimum wage<br>© ah OO AN mt A wo workers share<br>oO oO o al o al a<br>Oo oO oO oO oO oOo oO oO oO<br>N N N N N N N N N<br><!-- End of picture text --> <!-- Start of picture text --> 30 60<br>20 40<br>10 20<br>O O<br>-10 mam Profits (bln RON) - right -20<br>— Exports (annual growth)<br>-20 — Turnover (annual growth) -A0<br>D ro) a ~N o- s+ Ln wo<br>oO —_ —_ — — “i — Sn!<br>O Oo Oo Oo Oo Oo oO Oo<br>ot] ] ot “I ot ro] oe A<br><!-- End of picture text -->
<!-- Start of picture text --> 45 Sectors with with above-average 45 || 45 || 45 45 Sectors with with below-average 45<br>minimum wage workers share share minimum wage workers share share<br>30 30 || 30 || 30 30 30<br>15 15 || 15 15<br><!-- End of picture text -->

<!-- Start of picture text --> 45 Sectors with with above-average 45 || 45 || 45 45 Sectors with with below-average 45<br>minimum wage workers share share minimum wage workers share share<br>30 30 || 30 || 30 30 30<br>15 15 || 15 15<br>0 ) 0 0<br>-15 mam Profits (bln RON) - right -15)|-15 mat Profits (bln RON) - right -15<br>— Exports (annual growth) ——Exports (annual growth)<br>-30 — Turnover (annual growth) -30||-30 —Turnover (annual growth) -30<br>Dn OA NM FTN CLC Dn OxtAN mM TFT HN ©<br>O09 8 a et ae a a 0 8 80d te ae Be a<br>oONNio) oONNio) io)NNio) oOAN oOAN oON oONNio) lo)NNlo} oONNlo) oAN<br>14 : 1750<br>Gam Intercompany lending (bln euro) - left H<br>12 mam Equity, incl. reinvested profits (bln euro) - left 1500<br>e@=—FDI (bln euro) - left :preannouncedi . minimum<br>10 wage adjustments<br>8 =<=<=Minimum wage“ (RON) - right i: Za 1 2500 0<br>Ay<br>‘eh ._CC—F7F7N’e<br>4 . — | —_, || 500<br>2 -250<br>ita} wo TM~ co D oO nl N oO + Ww wo TM<br>Oora}N ra}aoN (on)co)N on}°N oOra}N aoro}N aoOoN ro)aoN aooON aoro)N aooON aoro)N aoON<br><!-- End of picture text -->
<!-- Start of picture text --> 0.7 :<br>? preannounced<br>= minimum wage<br>0.6 :i adjustments<br>05 - i<br><!-- End of picture text --> <!-- Start of picture text --> 0.4 - A oo<br>-——Labor share :<br>——Capital share :<br>0.3 3 rs as as |<br>NnSs =«8 sé nmBb Oosé mtS&F ©B8B BBS SaBB NEMOSsxtEaBa SeSs Nm2 woS83 sy85<br>Ss SG S&S S&F &F S&S S&S S&S GF GF FGtIFG BG G&G GB Ss<br>TMN mN N TMN N N N N N GN GN GN GN N N NN<br><!-- End of picture text -->
# **9. Impact on the general consolidated budget**

The impact on the budget was assessed by taking into account the effects of the increase in minimum wage on the revenues side (first-round effects, but also second-round effects) and on the expenditure side (for more details see Annex 4).

Between 2012 and 2016, the net impact of the increase in the minimum wage on the general consolidated budget was a positive one, between 3.4 million RON in 2012 and 1,362 million RON in 2016. The impact of the measure on the revenues side was between 56 million RON in 2012, when the minimum wage increased by almost 5% and 1,468 million RON in 2016, when the minimum wage increased by around 19%. The impact on the revenues side has significantly increased in 2015 as the number of employees from the private sector that were influenced by the measure grew by more than 40%. This trend continued in 2016.

_Figure 34. Evolution of the minimum wage impact on the budget_ <!-- Start of picture text --> thousands RON<br>1600<br>1468.3<br>1431.7<br>1400 1250<br>1200 1050<br>1000 900<br>800<br>800 700<br>600 493.8<br>400 298.1<br>175.8 178.4<br>200 106.0<br>56.3 52.9<br>0.0<br>0<br>2012 2013 2014 2015 2016<br>on revenues on expenditures minimum wage level (end of year)<br><!-- End of picture text --> Source: Authors, based on MPF, Substantiation notes of the Government decisions, NBR calculations On the expenditure side, the impact varies between 53 million RON in 2012 and around 106 million RON in 2016. The maximum impact on the expenditure side was registered in 2015, when almost 500,000 employees from the budget sector were beneficiaries of the measure. After a 25% across-the-board wage cut in July 2010, employees from the public sector had 33
benefited from two increases in the basic wages in 2012, 8% starting June 1 and 7.4% starting December 1. As such, in 2013 the increase in the minimum wage did not have any influence on the expenditure side, as all the wages from the public sector were already slightly above the new minimum level.

_Figure 35. Evolution of the minimum wage earners_ <!-- Start of picture text --> 1600<br>thousands of earners<br>1400<br>1250<br>1200<br>1050<br>1000 900<br>800<br>800 700 982.7<br>600 684.9 1,092.4<br>400<br>677.3<br>488.6<br>200 144.4<br>281.5<br>125.8<br>0 0.0 39.3<br>2012 2013 2014 2015 2016<br>in the public sector in the private sector minimum wage level (end of year)<br><!-- End of picture text --> Source: Authors, based on MPF, Substantiation notes of the Government decisions In 2016, most of the public employees had earnings at the level of or higher than the minimum wage, as a result of an increase in the public sector wages at the end of 2015.<sup>14</sup> As such, the negative impact of the increase in the minimum wage on the expenditures side had substantially diminished in 2016.

> 14 25% increase to hospital staff; 15% increase to teaching staff; 12% increase for public institutions subordinated at the local level; 25% increase to social assistance staff; 10% wage increase to the rest of the public sector employees.

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# **10. Conclusions**

We can summarize the main findings of our paper as follows:

- Gross minimum wage in Romania increased successively from 700 RON in January 2013 to 1,250 RON in December 2016, when the minimum-to-average gross wage ratio slightly exceeded the mean value across EU countries. As a result, the share of employees earning the minimum wage increased from 6% in 2012 to 31% in 2016. The majority of workers earning the minimum wage were employed in the private sector.

- At the same time, the share of people at risk of poverty or social exclusion decreased; moreover, empirical evidence suggests that, in general, Central and Eastern European countries that increased the ratio of minimum-to-average wage the most between 2010 and 2016 also saw a larger reduction in the share of employees at risk of poverty or social exclusion.

- The strong negative correlation between the size of the shadow economy and the gross minimum wage suggests that successive minimum wage increases may have possibly contributed to a gradual whitening of the labor market. Additional supporting evidence of this result is offered by the decline of the ratio of cash outside the banking system to M1 since 2013, when gross minimum wage growth started accelerating and the share of minimum wage workers recorded successive increases.

- The sectoral distribution of minimum wage earners suggests that during 2012–2016, on average, the economic sectors that registered the highest increases in the share of minimum wage workers (e.g. wholesale and retail trade; transport and storage; hotels and restaurants; professional, scientific and technical activities) also increased their share of employees in the economy-wide number of employees.

- The significant increases in gross minimum wage since 2013, with the adjustments being preannounced, coincided with a recovery of firms’ profits (across sectors with both aboveand below-average minimum wage workers share), while the potential negative spillover effects on unit labor costs and international competitiveness appear to have been limited.

- Using an event study framework, although difficult to be attributed one-to-one to an increase in the minimum wage, we show that a minimum wage hike could be associated with a reduction in inflationary pressures during the positive output gap period (i.e. negative unemployment rate gap shrinks or becomes positive), while having a reflationary effect during the negative output gap episode (i.e. positive unemployment rate gap shrinks or becomes

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negative). The effects are generally stronger in the case of youth unemployment, given a higher incidence of minimum wage contracts for this age group. In the case of the total number of employees, the effects of minimum wage hikes appear to be limited: the growth rate of the number of employees increases slightly during the positive output gap episode and slows down during the slack episode.

- The estimated direct impact of gross minimum wage increases on gross average wage dynamics ranges from 0.5 percentage point in 2013, when the minimum gross wage increase directly affected around 6% of the employees, to 1.5 percentage points in 2016, when the number of full-time employees earning the minimum wage reached 31% of the total.

- The impact on CPI inflation and on economic growth of the average gross wage increase as a result of the minimum wage raises was evaluated to be relatively contained during the analyzed period (2013-2016): it is estimated in the range of 0.1 to 0.4 percentage point for CPI inflation and around 0.2 percentage point for economic growth.

Overall, the positive effects of the minimum wage hikes in the period 2013-2016 seem to prevail. This does not mean that any increase in the minimum wage is warranted at any time. Our study shows that the positive effects were attributable to the very low starting levels, the cycle of the economy (negative output gap), the pre-announced program and support from IFIs for the first rounds of minimum wage increase, the country-specific factor that most of the minimum wage employees work in the private sector and the efficiency resources coming from whitening the labor market. Once the economy has moved into a positive output gap, and the gap between minimum and average wage has narrowed, further minimum wage increases need to be carefully addressed while considering their implications on a wide array of sectors, as described in our study.

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