At What Level Should Countries Set Their Minimum Wages

(ProQuest: ... denotes formulae omitted.)The authors would like to thank Frank HofFer and Pierre Labberte for their very helpful comments. The views expressed in this article are those of the authors and do not necessarily reflect the views of the International Labour Organization.At what level should countries set their statutory minimum wages? The academic literature has surprisingly little to say about this simple but fundamental question. A comprehensive review of the existing literature reveals that most research is exclusively concerned with the impact of marginal changes in minimum wage levels (see for example Neumark and Wascher, 2008). On one side, a large number of studies scrutinize the possible adverse effects of marginal changes on the quantity of wage employment in the formal and the informal economy. On the other side, a growing number of articles document the extent of the benefits of marginal changes on reducing low pay and inequality. Together, these studies feed a seemingly never-ending debate among economists about whether minimum wages are desirable or not.Yet, policy-makers seem to have made up their minds long ago. According to the ILO's Global Wage Report 2008/09, minimum wages are a nearly universal policy applied in some form or another in more than 90 per cent of countries in the world (ILO, 2008, p. 34). In all these countries, the main question that policy-makers have to answer is not whether a minimum wage should be adopted or not; it is "How should it be operated?" and "At what level should it be set?" The present paper discusses some relatively easily available indicators that can be used for setting minimum wages at the appropriate level, taking into account country-specific characteristics. The methodology does not contain much sophisticated econometrics, nor does it push the frontier of mathematical modelling. It seeks to make a contribution to a practical question, building on previous work done at the ILO (including ILO, 1992; Starr, 1993; Eyraud and Saget, 2005; Marinalas and Velasco, 2006; Belser and Rani, 2010; Vaughan-Whitehead, 2010; and Lee and McCann, 2011a).The paper recognizes that the determination of the minimum wage level is a sensitive issue which should be decided by governments after full consultation of - and ideally through negotiation with - social partners. Statistical indicators thus only represent a starting point or a reference point for these consultations. Ultimately, it is up to the national stakeholders to agree on one or more figures, depending on the weight that they attribute to different social and economic objectives. In fact, there is not one "ideal" minimum wage level. The objective of statistical indicators is not to substitute for tripartism or collective bargaining; rather, it is to inform governments and social partners about the range of values for which the benefits of a minimum wage are likely to exceed the costs.Part I of the paper proposes some preliminary considerations which revolve around the question of how minimum wage policies should be operated. It discusses in particular the role of social partners, the structure of minimum wages, their coverage and implications for the gender pay gap, the definition of what counts as wages, and enforcement strategies. Part II then dives into the question of the level of minimum wages by starting with a review of the criteria listed in the ILO Minimum Wage Fixing Convention, 1970 (No. 131), and a review of the trade-offs involved in minimum wage setting. Finally, part III proposes some operational indicators, including the calculation of a minimum living wage, the ratio of minimum to mean and median wages, and the estimates of the impact on the total wage bill and the level of prices.Some preliminary considerationsWhat exactly is a minimum wage? From a legal perspective, the minimum wage "represents the lowest level of remuneration permitted, in law or fact, whatever the method of remuneration or the qualification of the worker; it is the wage which in each country has the force of law and which is enforceable under threat of penal or other appropriate sanctions". …