Minimum wage increase and consume prices

In 2015, the annually fund of wage in Albania it was at 1.8 to 2.1 billion Euro, including the tax labour. Only 29% of that fund of wage belong to the minimum wage category. It is time that minimum wage should be increased, and maybe the effective time to give effect in the consume and economy it is not in the peak but the important it is not to be pushed more. But, the raising of minimum wage also will change the national standard of living. Even in Albania there’s no a minimum of standard of living, and this is another issue, we are talking the non-official standard of living.

The changes of minimum wage should be the new reality, after years of national debate about the need to raise pay so families can earn a living wage. According to administration estimates, this would boost the wages of some 100 thousand people. Supporters of these efforts note that women in particular are likely to benefit significantly. So what happens when the minimum wage is increased? Now, with the increase of the minimum wage, firms that face higher costs cannot maintain profits simply by raising prices regardless of demand for their products.

While the increase of the minimum wage will increase demand for those products purchased by low-income people, it will not yield an equal increase in demand for all products. One important issue regarding to the increase of minimum wage it is how should be increased? The general view in the literature is that a minimum wage of more than 50% of the median wage causes significant ill effects in terms of price rises and job losses. This increase in basic pay is credit negative for retailers, restaurants, hotels and leisure companies because of the cost of increasing pay for the hundreds of thousands of workers they employ, according to an analysis by credit rating agency Moody’s.

Prices will rise, but the working-class incomes will rise more than the price rises and they’ll still come out ahead. Overall, price increases are modest: For example, a 10% increase in the minimum wage would increase food prices by no more than 2% and overall prices by no more than 0.15%, significantly less than the minimum-wage increase. In the minimum-wage debate, much depends on framing and assumptions, as well as one’s interpretation of the larger patterns of increasing wage inequality. Although there is no doubt that inequality has risen in Albania (even not as in industrialized countries) over the past decade, studies can be found to support positions on both sides of the minimum-wage issue, and questions remain about the precise relationship with inequality dynamics.

The efficacy of minimum wage policies as an antipoverty initiative depends on which families benefit from the increased earnings attributable to minimum wages and which families pay for these higher earnings. Employment impacts experienced by low-wage workers are negligible and, therefore, these workers do not pay. The consumers pay for the higher labor costs through imperceptible increases in the prices of goods and services produced by low-wage labor. The minimum wage is a useful tool if the government values redistribution toward low wage workers, and this remains true in the presence of optimal nonlinear taxes/transfers. However, under certain labor market conditions, it may be better for the government to subsidize low-wage workers and keep the minimum wage relatively low.

At the same time, because work has a social dimension and is not purely an economic endeavor many employees might keep their jobs at the higher mandated wages because of employer loyalty or trust, or the simple desire to avoid the complications of restructuring business operations to account for fewer workers. For the minimum wage increases, even when the full higher labor costs are passed through to food consumers, the price increases are small. Thus, it is unlikely that higher food costs would fully offset the wage gains of minimum wage workers. The current minimum wage and what proponents have been calling the non-official living wage are quite near to each other.

But from that living wage, should be told that social and health contributions take at least 11% every month, meantime the minimum wage is untaxed because of exemption. The discussion about increasing the minimum wage is specific in Albania, because of the share of informality and evasion. One part of analysts discuss about the issue of minimum wage without specific situation and the other part takes the situation in consideration, but yet argue the need for the economy sake to forget for one moment the informality.

The studies from World Bank show that informality in the labour market it is around as of 48% of whole market, and this estimation is the biggest argument to be confronted with the increase of minimum wage discussion. And since this calculation is not extended at all workers, because of informality, there still exist the big problem to be solved by government. Minimum wage increases in real terms has been too low between 2000 and 2015 in order to provoke overall negative employment effects.

Employers have used adjustment channels other than employment to deal with the increase in labor costs. When the full cost of a minimum wage increase is passed through to consumer prices in the food and family service products, a 5% increase in the minimum wage (an increase of 1.000 Leks/ monthly) would not increase food prices because the actually market has not a direct link with that, since the informality distort the labour market at least for last twenty years. This confirmation has its own arguments, in the past time figures. If we see that minimum wage has increased more than 2 times during the period of time 2000 – 2015, it is not the same increase rate for the consume prices.

The consume prices have increased only 41.5% during this time. This report between minimum wage increase and change of consume prices confirm that the wage increase has not direct effect to inflation rate. Anyhow, the relatively small contribution of the real minimum wage increase to the increase in formal sector wages indicates that minimum wages are not a substitute for a growing economy or investments.