January 16, 2022

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Minimum wage increases not enough to shield poorest from rising prices

As inflation threatens living standards across the developed world, governments are stepping in to lessen the blow for some of the lowest-paid workers — but their actions will only partially protect those most in need.

Several European countries plan inflation-busting increases in their minimum wage in the year ahead.

In Germany, successive increases will lift the minimum wage almost 10 per cent to €10.45 over the year to July and the new ruling coalition has pledged to raise it further to €12. In Portugal, Poland, the Czech Republic and Romania, the statutory wage floor rose 6 per cent or more from January. France, whose hourly minimum is already one of the highest among rich economies, will continue to uprate it in line with prices (inflation in December was at 3.4 per cent). In the UK, the statutory wage floor will rise 6.6 per cent in April.

Meanwhile, the EU is planning draft legislation meant to ensure that minimum wages — where they apply — are high enough to be “adequate”, or at least 60 per cent of national median earnings.

It is a striking reversal of the policies pursued on the eve of the 2008 financial crisis, when EU leaders issued an ill-timed call for wage restraint to prevent price pressures mounting.

“This wouldn’t have happened a few years ago,” said Stefano Scarpetta, director of the OECD’s Employment, Labour and Social Affairs directorate. “This time, we are putting a lot of money into the economy and there is a concern it should go to those at the bottom end.”

The trouble is, governments are relying too much on a single tool — minimum wages — which will protect only some of those who are vulnerable.

Market forces are providing a tailwind, with labour shortages in some low-paying sectors forcing employers to compete for workers fiercely for the first time in years. In the US, although Joe Biden has not won support for his ambition to nearly double the federal minimum wage, salaries have risen fastest for those on the bottom rungs of the labour market — outpacing inflation over the past six months for the third of workers with the lowest earnings.

But economists warn that action is needed on a much broader front to protect households from a painful cost of living crunch.

A minimum wage was a good way to set a social norm, but “not a very targeted measure to fight poverty”, Scarpetta argued. Many of those receiving it live with a higher-earning partner and when the pay floor rises workers can often lose benefits or pay higher taxes as a result.

A higher wage floor can also lead employers to hire people on shorter hours or less secure terms — for example, the liberal use of zero-hours contracts in the UK’s hospitality sector — and only affects those close to the bottom of the earnings distribution.

“It only helps those who have the lowest pay. It’s not going to help create a middle class,” said Patrick Belser, senior economist at the International Labour Organization. Workers’ share of income would only rise in countries that also had effective collective bargaining arrangements, he said.

Laurence Boone, chief economist at the OECD, argued that “traditionally, policies to address inequality have focused on skills and on wage-setting — minimum wages, collective bargaining”. But now, governments needed to look more closely at other issues, in particular competition policy, she said.

New OECD research has found that as much as a third of overall wage inequality is due to gaps in the wages different companies pay for workers with similar skills. Workers are often unable to move even when better pay is on offer elsewhere because of restrictions imposed by their employers, such as non-compete contractual clauses.

To remedy this would mean a legislative clampdown — as the US and UK governments have pledged to do — and requiring competition authorities to look at the effects of mergers on workers, as well as consumers.

Stagnating living standards were “not the fault of the minimum wage”, Belser said. “It’s the absence of other policies.”

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