Minimum wages and their role for euro area wage growth
Published as part of the ECB Economic Bulletin, Issue 3/2022.
Minimum wages are prevalent in many euro area countries, and changes in minimum wages can have important effects on aggregate wage growth. Minimum wages exist in 15 of the 19 euro area countries. Minimum wage levels are set using different methods – including predetermined formulas, expert committee recommendations and consultation with social partners – and are often also subject to government discretion. The frequency of change differs from one country to another, but most countries revise their minimum wages every one or two years. Changes in minimum wages can have a direct mechanical effect on aggregate wage growth in an accounting sense. An increase in minimum wages pushes up the wage level of those who previously received a wage below the new minimum wage. The increase of the minimum wage can – especially in the case of large increases – also push up the share of minimum wage recipients in the economy. Minimum wage changes can also have an indirect impact through knock-on effects on above-minimum wages in order to keep a certain distance from minimum wages or through the use of minimum wage increases as a benchmark for wage negotiations.
Growth in minimum wages and wages and salaries over time
While minimum wages in the euro area have on average tended to grow at a similar pace as wages and salaries, minimum wage growth has also strongly deviated from growth in wages and salaries in some years. At an average of 1.5% in the years 2009 to 2019 (roughly from the outbreak of the global financial crisis to before the pandemic), minimum wage growth has been slightly lower than growth in wages and salaries per employee, which increased by 1.8% in the euro area (Chart A). The largest deviation of growth in wages and salaries per employee from that in minimum wages was observed in 2019 when, at 4.7%, minimum wages grew at a far stronger pace than wages and salaries per employee at 2.5%. During the pandemic in 2020 and 2021, when many wage agreements provided for only low or even no pay increases while developments in wages and salaries per employee were strongly affected by job retention schemes, minimum wages grew by on average 2.2% in 2020 and 1.7% in 2021.
Growth in the level of minimum wages is often broad-based across countries, but, in quantitative terms, changes in large countries dominate average euro area developments. For the first time since 2008, all countries with minimum wages increased the statutory national minimum wage level in 2019 (Chart B, panel a), contributing to the relatively high growth in minimum wages in that year. The key driver of the strong increase in the euro area aggregate was a minimum wage increase of around 22% in Spain (Chart B, panel b).
Minimum wage growth across euro area countries
Minimum wages are expected to grow substantially in many euro area countries in 2022 and 2023. Based on current information, minimum wages are expected to increase in 12 of 19 euro area countries in 2022 (Chart B, panel a). The most pronounced increase is in Germany, where the minimum wage is set to rise to €12 per hour in October 2022, reflecting a 25% increase compared with the December 2021 level (€9.60). As it only occurs in the fourth quarter, this increase will be reflected in minimum wage growth in year-on-year terms in 2022 and 2023 (see also Chart B, panel b). Minimum wage-setters have motivated these strong increases by the need to catch up after minimum wages grew less strongly than average wages and salaries as well as by the currently high inflation rates hitting especially lower-income households, for whom items with very high inflation rates like energy and food reflect a comparatively large part of the consumption basket. Given the high uncertainty about the outlook, additional changes in minimum wages over 2022 and 2023 − beyond those already decided and those implied by inflation indexation clauses for minimum wages − seem likely.
Calculating the direct mechanical effect of minimum wages on overall wage growth requires information on the number of recipients. To derive a proxy for the share of wages and salaries paid to minimum wage recipients in overall wages and salaries, this box uses data from the EU Statistics on Income and Living Conditions (EU-SILC), which, however, are currently only available until 2018. The direct mechanical effect on overall wage growth is then calculated by multiplying the growth rate of the minimum wage by the share of minimum wages in overall wages and salaries. Assessing the effects of changes in minimum wages on overall growth in wages and salaries after 2018 (the latest year for which data are available) requires further assumptions on how the share of employees receiving minimum wages has developed since 2018. In this box we consider two options: under the first option we hold the number of recipients constant at the 2018 level. Under the second option, we adjust the number of recipients on the basis of the share of employees, which in 2018 would have fallen below the new level of the minimum wage to be implemented in the following years. While the first option is likely to underestimate the share of recipients and thereby the direct mechanical impact on wage growth, especially in the case of large increases in the minimum wage, the second option is likely to generate estimates that are on the high side as the overall wage scale tends to move up every year. These two options provide a range that reflects the uncertainty on the size of the direct mechanical effects of minimum wage changes.
Changes in minimum wages can be expected to contribute more strongly than usual to euro area wage growth in 2022 and 2023. Since 2008, the direct mechanical contribution of minimum wage changes to growth in wages and salaries in the euro area has tended to be below 0.1 percentage point per year based on the shares of minimum wage recipients that can be calculated on the basis of EU-SILC data up to 2018. In 2019, the effects are estimated to be substantially higher if the potential effects of the exceptionally large increase in the minimum wage in Spain by 22% (see Chart B, panel b) on the share of minimum wage earners is taken into account. In this case the contribution of minimum wage changes to overall wage growth in the euro area is pushed up from around 0.1 percentage points (assuming an unchanged share of minimum wage recipients in Spain in 2019 when compared to 2018) to 0.2 percentage points (assuming an increase of the share of minimum wage recipients in Spain, including all employees who in 2018 earned less than the minimum wage of €900 per month introduced in Spain in 2019). Contributions of minimum wage increases to overall wage growth are anticipated to be much higher than usual in 2022 and 2023. Based on the assumption that the number of minimum wage recipients is kept unchanged at the 2018 levels, minimum wage growth in the euro area can be expected to increase by more than 4% in 2022, and even close to 8% in 2023, and contribute around 0.1 percentage point to euro area wage growth in 2022 and 0.2 percentage points in 2023 (Chart C). The strong increase in minimum wage growth in the euro area is significantly driven by the increase of the minimum wage to €12 per hour in Germany in October 2022. If the share of minimum wage recipients is adjusted for the case of large increases in minimum wages – i.e. to include in Germany all employees who earned €12 per hour or less in 2018 and in Spain all employees who earned a wage of less than €900 per month in 2018 – minimum wage growth in the euro area can be expected to increase by more than 4% in 2022 and even around 9% in 2023 – implying a direct mechanical contribution of minimum wages to growth in wages and salaries of around 0.2 percentage point in 2022 and around 0.4 percentage point in 2023.
Direct (mechanical) contribution of changes in minimum wages to growth in wages and salaries
The four euro area countries with no statutory minimum wages are Italy, Cyprus, Austria and Finland.
Growth in compensation per hour increased over 2009-19 by on average 2%.
For more details see the boxes entitled “Short-time work schemes and their effects on wages and disposable income”, Economic Bulletin, Issue 4, ECB, 2020 and “Developments in compensation per hour and per employee since the start of the COVID‑19 pandemic“, Economic Bulletin, Issue 8, ECB, 2020.
For the effects of inflation on minimum wages (for example via indexation and the role of minimum wages for industry-level bargaining) see for example Gautier, E., Fougère, D. and Roux, S., “The Impact of the National Minimum Wage on Industry-Level Wage Bargaining in France”, Working Paper Series, No 587, Banque de France, April 2016. On the exposure of households to energy price shocks by income see for example Chart 6 in “Energy prices and private consumption: what are the channels?” Economic Bulletin, Issue 3, ECB, 2022.
First, the share of minimum wage recipients is calculated on the basis of the EU-SILC data. For this we calculate the share of employees with an income within a band of 90% to 110% of the minimum wage. Second, this share is then applied to the total number of employees in the economy to derive the number of recipients of minimum wages in an economy. Multiplying this number by the respective level of the minimum wage in each country gives the amount of wages and salaries that can be assigned to minimum wage recipients and allows for the calculation of the share of this group in overall wages and salaries in each country and – by aggregating country results – the euro area. Controlling for differences in hours worked by minimum wage recipients and overall employment does not substantially affect the results. The percentages of employees have been estimated using EU-SILC microdata for every year up until the last observation of 2018. For the rest of the sample the percentages are kept constant, except where country-level administrative data are available to complement the analysis. For more details see the box entitled “Recent developments in social security contributions and minimum wages in the euro area”, Economic Bulletin, Issue 8, ECB, 2019.
For a calculation of the effects of the planned minimum wage increase on wage growth in Germany see also “The macroeconomic impact of the planned increase in the general statutory minimum wage to €12 per hour”, Monthly Report, Vol. 74, No 2, Deutsche Bundesbank, February 2022.