The Minimum Wage and Informality Model in Albania

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This study examines the relationship between minimum wages, labour productivity, informality, and employment in Albania over the period 2015–2025 by combining econometric analysis, counterfactual simulation, and regional comparison. The theoretical framework is based on the function LM = f(MW, INF, PROD, FORMC, LABS, EMIG) and integrates data from INSTAT, the Ministry of Finance, the Social Insurance Institute, OECD, the World Bank, and ALTAX. The empirical analysis employs Ordinary Least Squares (OLS) regressions, alternative time-trend specifications, distributed-lag models, instrumental-variable estimation (IV/2SLS), and a counterfactual simulation assessing the impact of increasing the statutory minimum wage from ALL 40,000 to ALL 50,000 in 2026.

The findings indicate that historical evidence does not reveal a statistically significant relationship between minimum wage increases and unemployment. However, when minimum wages grow faster than labour productivity, the risk of expanding informality increases, particularly in low-productivity sectors. The counterfactual simulation estimates that the informal economy could expand by approximately 1.1–3.0 percentage points depending on alternative elasticity assumptions, while sectoral evidence identifies agriculture as the most vulnerable sector to informality pressures. The study also highlights the relevance of the Kaitz Index and the minimum wage–productivity relationship as key structural constraints for wage-setting policies.

Despite limitations arising from the small sample size and the absence of official time-series data on informality, the study proposes an evidence-based policy package including productivity-linked minimum wage indexation, reductions in labour formalization costs, sector-specific transition mechanisms, and stronger formalization policies prior to further administrative increases in the minimum wage.

Keywords: minimum wage, informality, labour productivity, counterfactual simulation, OLS regression, econometrics, labour market, Western Balkans

JEL Codes: C22, C26, C51, E24, J31, J38, J46, O17

Categories: , Tags: , , , , , , ,

Description

This study operationalizes the theoretical framework, also drawing on the recent IMF study[1], where LM = f(MW, INF, PROD, FORMC, LABS, EMIG) for Albania, supporting it with real data from INSTAT, the Ministry of Finance, the World Bank, the OECD and ALTAX, running OLS regressions on the 2015–2025 time series, building a counterfactual simulation[2] for the increase in the minimum wage in January 2026 (40,000→50,000 lek), and comparing Albania with the other five Western Balkan (WB6) countries.

Key findings (numerical)

  • Albania’s Kaitz Index (MW/average wage) is 45% in 2025 and is expected to reach 53% in 2026, i.e. above the average of the countries under the highest pressure in the region (Montenegro, North Macedonia = 54%) and well above Kosovo (27%).
  • The OLS regression (n=10, 2016–2025) between the annual growth of the MW and the change in unemployment yields a positive coefficient (β=0.034) but statistically non-significant (p=0.43); that is, in the historical data, MW increases are NOT clearly associated with a short-term rise in unemployment, which is also supported by the fact that MW increases have occurred during periods of economic growth.
  • The alternative specification (unemployment level log(MW) + trend, n=11) has R²=0.865, but is strongly conditioned by multicollinearity[3] between MW and the time trend (Condition Number=1,960); the continuous rise in MW and the fall in unemployment share the same post-crisis secular trend, not necessarily a causal relationship.
  • According to ALTAX’s empirical finding, productivity has risen by only 0.6% for every 5–6% wage increase (elasticity ≈0.11); applying this ratio to the 25% MW increase for 2026 yields a “gap” of 1.2 percentage points between the wage increase and the productivity increase that would be needed to offset it.
  • The counterfactual simulation (3 elasticity scenarios drawn from the international literature, 0.15–0.40) shows that the informal share of GDP could increase by 1.1–3.0 percentage points as a direct consequence of the 2026 minimum-wage shock, rising from a base of 30% to 31–33%.
Concrete proposals (ranked by fiscal/social impact)
  1. Implementation of what was proposed earlier in the ALTAX study[4] regarding labour contributions, which includes lowering contributions from 27.9% to 23% for wages up to 80,000 lek, an estimated measure that would raise formal employment by 4–6% and broaden the tax base.
  2. Linking future MW increases to an explicit formula MW ≤ θ·LP (θ=0.45–0.55, differentiated by sector), instead of ad-hoc administrative decisions as has been the practice until now.
  3. Prioritizing formalization (fiscalization, digitalization of payments) before any new MW increase above 50,000 lek, since a Kaitz Index already above 0.60 has reduced the room for further increases without an informality cost.
  4. Differentiating policy by sector, where agriculture (low productivity, 32% of the labour force) and small firms are more exposed to the MW/LP > k threshold; consider longer transition periods for these sectors.
  5. Treating the labour shortage (8.3% unemployment, net outflow of 28,000/year) as a constraint just as important as informality, with policies for the return of the diaspora and increasing labour-force participation (currently 75.9%), which should accompany every wage reform.

Main methodological limitation. Informality (INF) does not exist as an official quarterly/annual series in Albania. All figures on informality are interval estimates from different methodologies (see Section 8). The regressions presented below are illustrative and exploratory, not confirmatory; a sample of 10–11 annual observations does not allow for strong causal inference.

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