EKIP– Expert Club for Economics and Politics A Different Opinion
The time has come for the drafting and adoption of the state budget, and, as we are used to every year, there has been talk of increasing the minimum wage (MW). Along with its other social measures, the so-called “right” government has decided to increase the MW twice next year – at the beginning and in the middle of the year, with its value from July 2015 reaching 380 leva, compared to 340 so far. This increase is bolder than the one made at the beginning of 2014, which amounted to 30 leva, and compared to the 20 leva increases from previous years. Since its jump is more significant, we can accordingly expect that the negative effects that follow from them will be more tangible.
The first and most obvious effect of increasing the minimum wage inevitably falls on employment. Although, according to leftist and “social” politicians, the minimum wage is an instrument of justice and a method of protecting workers from the arbitrariness of employers, the reality is quite different: the institutionalization and increase of the minimum wage is nothing more than the creation of forced unemployment. This is due to the fact that, according to the terms of the minimum wage (what wages actually represent from the perspective of companies), it is illegal for employers to hire employees for a lower wage.
The direct result of this type of "fairness" is the restriction of access to the labor market, especially for those who, according to the leftist narrative, most need special care - people with low education, the young, and those in disadvantaged situations.
The reason for this is that they are unable to produce – or do not have the necessary experience to do so – services that are worth the minimum wage. For this reason, those who, in the absence of such a barrier, would be employed at wages lower than the current threshold, remain unemployed. My own calculations based on data on the average wage by educational level indicate that the average wage of people with primary and lower education is about 300 leva per month, which – if there were no methods to avoid the minimum wage threshold, such as part-time employment – would leave them out of the labor market altogether.
Meir and West (2013) prove the correlation between wage increases and unemployment growth. Since 2003, when the rhythmic increase in the minimum wage began, Bulgaria has observed the same trend – at the beginning of the year, when the new minimum wage values come into force, there is always a jump in unemployment. And while in some years, for example 2011, the increase is weaker – from 11.2% to 12.2%, when this effect is combined with more difficult economic conditions, the jump is significant – at the beginning of the difficult 2010, for example, when the crisis in the country has the most visible impact, the increase in unemployment is from 6.7% to 10.2%. The peak is even more obvious in youth unemployment, which increases by 3-4% at the beginning of the year.
However, increasing unemployment and restricting access to the labor market is only the most obvious impact of raising the minimum wage. Some of the "hidden" effects are borne by companies, especially those that employ a large number of low-paid workers. They do not magically start producing more and better quality output, and the difference between their productivity and the new wage is borne by the companies' budgets. Although the correlation here is not as strong as with unemployment, and a number of other factors must be taken into account, the highest number of company bankruptcies is observed in the first 3-4 months of the year in Bulgaria.
When these firms do not exit the market entirely, the burden of the increase in the minimum wage is also borne by consumers. Covering the costs of the new wages of workers is reflected in final consumer goods, the prices of which increase so that firms can bear the increased labor costs.
Another "hidden" effect of increasing the minimum wage is the impoverishment of the entire economy. This is due to the fact that due to the higher number of unemployed, more funds are taken from the working people in the form of taxes. These resources, which could be spent by the individuals who earned them, are now directed to people thrown out of the labor market and to the state administration. Moreover, since the MWL artificially increases the costs for employers, it de facto reduces the competitiveness and productivity of some companies. As a result, they produce less than they would have produced if the minimum wage had not been introduced at all.
Arguments in favor of the minimum wage often point out that raising it increases the incomes of the poorest families. Put this way, the goal seems noble (aside from the fact that there is no such thing as a free lunch and someone will have to pay the price), but unfortunately this argument is completely false. Mark Wilson (2012) clearly demonstrates that a very small percentage of those in poverty earn the minimum wage and therefore increases in it have no impact on them. Conversely, Wilson’s data supports the argument that raising the minimum wage has an impact mainly on initial entry into the labor market and keeping people trapped in unemployment.
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