THE IMPACT OF MINIMUM WAGE GROWTH ON GDP

Maria-Lenuţa CIUPAC-ULICI, Lecturer PhD.

Hyperion University of Bucharest
IPAG Business School Paris
[email protected]

Abstract: Debates on the theme of minimum wage remain acute, which confirms the
validity of pros and cons arguments of introducing the salary minimum. Although both sides
set theories, the relevant empirical research in recent times is relatively consensual to the
need for implementation of the minimum wage as an instrument or reduction measure of
economic and social inequalities, diminishing poverty and material deprivation and growth
inclusive economy. In the last few years, the discussion is focusing mainly on the level /
dynamics optimal minimum wage, beyond which the net effects of implementation would
begin to be negative. The propose of the papers is to analyze the impact of minimum wage
growth and the financial crisis from 2008 on gross domestic product in Romania by a linear
regression.

Keywords: minimum wage, GDP, financial crisis

JEL Clasification: E24, E20, H12

1. INTRODUCTION

The proposal to increase the minimum wage is a measure that has positive effects in economic and
social terms taking into account the specificity and the current conditions of the Romanian
economy.
Why is this measure of raising the minimum wage good?
o First, raising the minimum wage is beneficial to the economy as it improves the
long-term growth potential of the economy and increases the labor factor's
contribution to potential GDP growth.
o Secondly, this measure would have a positive impact on economic growth.
o Thirdly, the impact of rising gross minimum wage on inflation is very low,
o Fourthly, the measure of raising the minimum wage would have a positive impact on
the labor market, given that the demand for labor is high and can not be satisfied.
The rise in the minimum wage in recent years has been more determined by labor
market conditions and less by government action, the main cause being the
companies facing problems in meeting labor needs. Moreover, the current minimum
wage in Romania is low, placing us on the forefront of the EU.
o Fifth, from a social point of view, it would be a beneficial measure because 30% of
employees earn minimum wage. A minimum wage increase of nearly 10% will
benefit some 1.5 million people in the poverty-stricken area, helping them pay their
maintenance, debts to the bank, or secure their minimum food.
The Federal Ministry of Labor and Social Protection in Germany states that:
 The minimum wage allows people to participate in the economic results obtained. It
provides the basis for decent wage entitlements, especially in those economic sectors where
low wages are widespread;
 Compulsory minimum wage protects employees in Germany against employers who pay
low and inadequate wages. In this way, the compulsory minimum wage is also a
contribution to the loyal and functional competition in the economy. On the same time, it
ensures greater stability of social security systems;
  The minimum wage protects workers in low-wage economic sectors against firms that are
engaged in wage dumping. In addition, due to the minimum wage, competition between
companies will no longer take place at the expense of employees whose salaries were
continuously shrinking, but bringing higher quality products and services to the market.
Since January 1, 2018, Romania has the largest percentage increase, of 31%, of the gross minimum
wage in Central and Eastern Europe, but the net growth is much lower. With a minimum gross
salary of 413 euros (1,900 lei) per month, or 252 euros net, Romania is still on the penultimate spot
in the European Union in this chapter. Bulgaria is the last with a minimum net salary of 226 euros
per month. If a Romanian employee earns 252 euros net, as a minimum wage, one Hungarian
employee has 40 euros more, while one in the Czech Republic has 165 euros above the level on the
local market. By comparison, a Polish employee earns 113 euros more than a paid Romanian at a
minimum.

2. LITERATURE REVIEW

In many of the world's countries, the trend is to increase the minimum wage, and a decrease is
associated with specialized studies with austerity measures that have the effect of lowering the
economy.
According to a study by Eurofound (the EU Foundation for the Improvement of Living and
Working Conditions), in most of the European countries, in 2017 there was an increase in the
minimum wage. Thus, out of 22 countries surveyed, 19 countries registered a legal minimum wage
increase between 1 January 2017 and 1 January 2018 in nominal terms, of which 18 in real terms.
The European Social Charter provides for the need for a fair remuneration for a decent minimum
standard of living for workers and their families, considering that an average minimum wage of at
least 60% of the average net wage would provide this desideratum.
The International Monetary Fund concludes that, in the situation of the Central and Eastern
European countries, at a ratio of 50% minimum wage / average salary there are no negative effects
on employment and competitiveness.
In 2015, Germany introduced the minimum hourly wage for certain economic branches, and this
was the benefit of about 4 million employees. Starting from the 1st of January 2017, the minimum
wage has increased, since January 2018 it becomes mandatory for all economic branches and no
exceptions are allowed, and the next increase was in January 2019. Moreover, according to the
Federal Ministry of Labor and Social Protection in Germany, 80% of the population is in favor of
the minimum wage and its introduction is the most important social-political reform in recent years,
being considered a success story. Many previously poorly paid jobs have become jobs with social
security, respectively the active population has increased and wages have also increased.
The support for raising the minimum wage was also achieved in the most liberal country of the
world, it was supported by the world's largest economists. So, in 2014, in the USA, a number of 75
American economists signed a letter urging them to raise their minimum wage, including Nobel
Prize winners Joseph Stiglitz, Kenneth Arrow, Eric Maskin, Peter Diamond, Robert Solow, Michael
Spence, Thomas Schelling and a number of other well-known economists such as Larry Summers,
Emmanuel Saez, Dani Rodrik, Daron Acemoglu, etc. In that letter it claimed that in the financial
literature there are many studies showing that the minimum wage had a insignificant negative effect
or had no negative effect on employment even in times heavier for labor market. Moreover, the 75
economists claim that scientific research has shown that raising the minimum wage could have a
stimulating effect on the economy.
A letter was published in Romania in 2014 but against raising the minimum wage. According to this
letter, raising the minimum wage is considered an anti-social and destructive measure for the
economy. It was considered so "destructive" for the economy that more than 466,000 jobs have
been created since then, the unemployment rate has fallen to the 4.5% minimum and the
unemployment rate among young people has fallen by more than 23 %. Moreover, in the economic
news appeared the idea consisting in cutting the minimum wage as "recovery solution for
Romania". This is even worse than 25% wage cuts in 2010 and overnight increases in VAT from
19% to 24%, measures that have had destructive effects on the economy and which took about 8
years to make the economy returns to the pre-conditions. Scenarios show that the immediate effect
of raising the minimum wage would lead to an increase of nearly 2% in the number of employees
attracted by a higher wage. The percentage would be somewhat higher among young people (15-24
years) who are more likely to get into work with a minimum wage.
The Friedrich Ebert Stiftung analysis concludes that raising the minimum wage can be an effective
social policy to reduce poverty.

3. RESEARCH METHODOLOGY

To analyze the impact of the growth of the minimum wage and the financial crisis in 2008 on
economic growth, we have achieved the following linear regression:

GDP = c 1 + c 2 * MW + c 3 * DUM + ℇ t
Where:
GDP - Gross Domestic Product
MW - the minimum wage on economy
DUM - the dummy variable related to the 2008 financial crisis
ℇ t - the residual variable

The data sample comprises 39 observations, the analyzed period being 1999 S1 - 2018 S1, the
frequency of the data being semestrial. The analysis is made only on Gross Domestic Product and
Minimum Wage in Romania (Annex 1). The regression was done in Eviews. The data were taken
from the Eurostat database. Data on minimum wage and gross domestic product are expressed in
percentage terms, as well as an increase from one year to the next. The financial crisis variable is a
dummy variable, which has a value of 0 for the period 1999-2007 (period before the crisis), namely
the value 1 for the period 2008-2018.
Many full-time workers earn incomes below the minimum subsistence level or the minimum decent
living standard calculated at the level of households. Romania has the highest poverty rate among
workers full-time in the EU (13.3% of the total). The situation is even worse in terms of the poverty
rate among part-time workers, where Romania, by 61%, has almost 4 times than the EU28 average
(Chart 1).

Chart 1: The weight of employees full-time being in their risk of poverty in total (2017)

Source: Eurostat
During the period 2003-2007, the productivity growth rate was 2.5 times higher than the minimum
wage, which rose by only 56% in nominal terms. Also, the increase in the minimum wage was
lower than the increase in inflation until the first quarter of 2007, which also reflected the decrease
in the purchasing power of employees paid with this salary.
If, prior to 2008, the minimum wage was not correlated with the overall economic situation, starting
with 2013 relatively high growth rates have allowed the increase in the minimum wage, so it can be
observed an increase in consumption and economic growth beyond the initial projected values.
The successive increases in the minimum wage led to an increase in the purchasing power of the
beneficiaries by 65%, in the context of reduced VAT on food and world commodity prices.
The increase in the minimum wage also had a notable effect on reducing the poverty rate among the
employed population. Thus, between 2007 and 2015, where the difference between the minimum
wage and the average wage decreased by 13%, the data show a reduction in the risk of poverty and
social exclusion of 12.5% and the material deprivation rate of 11, 9%.
In 2013, 430,361 full-time employees had a gross income below or below the country's gross
minimum wage, respectively 11.2% of all full-time employees.
Almost 80% of them worked in commerce, manufacturing, construction, transport and storage,
agriculture and hotels and restaurants. The trade, manufacturing and construction sectors held over
60% of all workers with a gross income below or below the country's gross minimum wage.

Chart 2: The weight of part-time contracts that are in their risk of poverty in total (2017)

Source: Eurostat

According to the efficiency wage theory, raising the minimum wage will generate additional
productivity gains, especially among low- skilled workers. In the period 2012-2017, according to
Eurostat data, the real growth rate of real labor productivity (per employed person) was 32% in
Romania, and the real productivity growth rate (per hour) was about 40 % - the highest growth rates
in the European Union.
In the period 2012-2015, where the gross minimum wage increased from 700 lei to 1,050 lei, both
the number of employees and the turnover registered increases in the sectors with the highest
proportions of employees with the minimum wage, shows the analysis. The staffing effect grew in
trade with 52,212 people, and sector turnover grew by 4%, while sector profitability grew by
80%. In manufacturing, staff increased by 42,725 people, turnover increased by 10% at sector level,
while gross profit tripled.

4. THE RESULTS OBTAINED

4.1. Descriptive statistics

The table below presents the descriptive statistics of the analyzed variables. The average of the
variables analyzed is positive throughout the analyzed period. The minimum value of the variables
analyzed is negative, which means that in the analyzed period, Romania experienced fewer wage
decreases.
According to Skewness, the minimum salary variable distribution has the elongated right tail. As
regards the distribution of the GDP variable, it has the elongated left side.
According to Kurtosis coefficient values, the distributions have a value greater than 3, therefore the
analyzed distributions are sharper than the normal distribution (leptokurtosis).

Table no. 1: Descriptive statistics of analyzed values

MW GDP
Mean 0.080579 0.04594
Median 0.059219 0.042782
Maximum 0.39788 0.175813
Minimum -0.111405 -0.206432
Standard deviation 0.123386 0.067954
Skewness 0.952338 -1.344748
Kurtosis 3.470999 7.130452
Jarque-Bera 6.255646 39.47779
Probability 0.043813 0
Source: Own work in Eviews

4.2. Interpretation of the results obtained

According to the results obtained, there are other factors influencing GDP as R 2 is only 15.56 %.
In other words, only 15.56% of the GDP variation is explained by the variation in the minimum
wage and the financial crisis.
Evolution of minimum wage has a positive influence on GDP. The impact is not statistically
significant, as the probability is above the 10% threshold (prob.= 0.2793 ). The minimum wage
coefficient is 0.094837, which means that for a unit wage increase, GDP will increase by 0.094837
units.
The financial crisis of 2008 negatively influences GDP (the coefficient for this variable is -
0.043279). The impact is statistically significant for the significance threshold of 5%, as the
probability falls within the threshold (prob.= 0.0487).
The regression will look like this:

GDP = 0.062712 + 0.0094837 * SM - 0.04328 * SUN + ℇ t

The minimum wage in Romania has increased most in the last 10 years compared to other EU
countries. The amount has doubled, but remains one of the smallest in Europe.
From 1 January 2010 to 1 January 2019, the minimum wage has risen by over 200%. So, from this
point of view, we are ranked first in the European level. And as from 2010 almost every year we
have witnessed the rise in the minimum wage in the economy, the figures should not surprise us. In
cash, this means an increase of just over 1200 lei, that is, the equivalent of 260 euros.
Although far away from our country, the second place in the Eurofound`s ranking is occupied by
the Bulgarian neighbors, where the increase exceeded 110%. And the podium is completed by
Hungary, with an even smaller advance - below 90%.
In spite of all these percentage increases, Romania continues to count among the countries with the
lowest minimum wage in Europe: just over 400 euros per month. Thus, only Bulgaria and Lithuania
had lower minimum wages at the beginning of this year - 400 and 260 euros per month respectively.
On the opposite side, the highest minimum wage is in Luxembourg - almost 2000 euros per month.
And in the Netherlands and Ireland, the minimum wage exceeds 1500 euros per month.
Even so, raising the minimum wage in Romania does not solve the problem of living standards. The
reality behind the statistics shows that the Romanians continue to immigrate to Western Europe in
search of a better living. The point is that these are not just leaving unskilled labor. Experts are
starting to emigrate, too. Data show that in the last 12 years 3.4 million Romanians have left the
country since 2007 until 2019.
Evolution of the minimum wage over the last 8 years:
 Romania 216.7%
 Bulgaria 112,5%
 Hungary 87.8%
 Estonia 79.9%
 Poland 59.5%
The lowest minimum wages in Europe on 1 January 2018:
 Hungary 444,1 €
 Latvia 430 €
 Romania 407,3 €
 Lithuania 400 €
 Bulgaria 260,8 €
Highest minimum wages in Europe - January 1, 2018:
 Luxembourg 1998,6 €
 Ireland 1614 €
 Netherlands 1578 €
 Belgium 1562,6 €
 France 1498.5 €

5. CONCLUSIONS

In conclusion, raising the minimum wage has a positive impact on economic growth and long-term
development, does not affect inflation, it is determined more by the labor market conditions in
which companies face difficulties in meeting the labor force needs, taking into account the specifics
of the Romanian economy and it is in line with current trends in European economies.
Implementation of an adequate minimum wage is necessary to reduce inequality in the distribution
of national income between labor and capital. If in developed countries we observe a balanced share
of compensation of employees and capital, in Romania only 36% of GDP is allocated for
remuneration of employees, 55% for remuneration of capital and the remainder for indirect taxes
minus subsidies. Moreover, the public intervention for a higher rise in the minimum wage in
Romania in recent years also arises from the need to correct an imbalance associated with the crisis
- those who have suffered much of the burden of the crisis were employees (the remuneration of
employees in GDP decreased from 36.5% in 2008 to 34.4% in 2016, according to Eurostat).
Increases in the minimum wage in the last 15 years led to a sensible increase in the employment
rate, to the performance of companies with the highest rate of employees with minimum wage and
to a slight reduction of the poverty of the employed.

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Appendix: Evolution of variables analyzed

Chart 3: Evolution of minimum wage

Source: Eurostat
Chart 4: Evolution of Gross Domestic Product

Source: Eurostat