The effect of minimum wage policy in Albania

The effect of minimum wage policy in Albania

In 2015 the head of a family working full time at the basic minimum of $1.10 per hour would have earned $2,255 or 18% percent less than the basic living standard (non-official one) for a nonfarm family of four. However, Albanian minimum-wage policy has had profound effects on some segments of the labor force.

For one thing, the law’s coverage has been broadened greatly over the post communism period, bringing in industries with lower and lower wages. For another, since the minimum is the same regardless of the age of the worker, it has very different impacts on different wage groups. In 2015 the $1.10 minimum wage it was 45 percent of the median wage meanwhile, in 2005 the $0.62 minimum wage it was 41 percent of the median wage.

Although the minimum wage is favored or opposed for a wide variety of reasons, it appears to be basically an attempt to alter the distribution of income.

Minimum wages do, of course, distort relative prices, and hence compromise economic efficiency, but so do all other attempts to redistribute income through the tax-and-transfer system. The important question is not whether minimum wages distort, but whether the benefits of any income redistribution they bring about are in some political sense sufficient to outweigh the efficiency costs. Economists may still be able to devise tax-and-transfer schemes that do the job better-that is, bring about the same redistribution with less distortion, but if minimum wages do the job reasonably well, who is to say that the politicians are making a big blunder.

The single most important issue in determining the distributional effect of minimum wages is the disemployment impact, and this has been the topic of a long string of economic evaluations.

Anyhow, a boost in the minimum wage will give workers more leisure time, perhaps enhance a worker’s pride in his job, curtail job quitting and hence improve employment histories, productive employers into creating more productive, if somewhat fewer jobs, and so forth. At the present level of ignorance, it is difficult to know which type of bias is more serious, and my approach will be to stick with objective concepts, such as the mean and variance of worker’s disposable income and the value of lost employment opportunities.

Two important questions arise in the determination of minimum-wage policy.

The first is obviously how high the minimum should be set. While the results here do not give a precise answer because one cannot put utility weights on all the outcomes, the basic facts are clear. As the minimum wage is increased of 8 to 10 percent of the median wage, more and more workers confront the grab-bag combination of a higher wage but a reduced probability of having a job.

This uncertainty is not innately disturbing, but it magnifies many of the undesirable implications of minimum wages: compliance difficulties will no doubt intensify. More workers will either lose their jobs or have to take part-time jobs. More of the benefits will go to high-income families. And the impact on factor costs and product prices will grow disproportionately. At some point these complications make it unwise to boost the minimum wage any more, and that point is likely to be not much above the present minimum.

The second important policy question is whether the minimum should be differentiated according to the age of the worker. The results here suggest casting a moderately strong vote for a differential. If anything, mini-mum wages seem too low or about right for experienced workers’ and too high for young workers.

The practical problem in introducing a differential has been the fear of internal substitution:

What is to prevent employers from laying off high-wage experienced workers’ to hire young workers?

The employment-demand relationships estimated here suggest some existing substitution of this sort between low-wage workers and woman’s, though the prevailing low elasticities estimated here and in most other studies of labor demand also provide evidence to the contrary. Whatever the case, the “youth differential” seems a desirable goal-in effect evening out young’s and experienced workers’ wages less and unemployment rates more. And it seems eminently feasible to introduce this differential gradually, monitoring the internal substitution and stop-ping when and if adult disemployment becomes too great.

While the results for experienced workers are sufficiently mixed that different observers would arrive at different conclusions, my own view is that as long as minimum wages are kept low relative to other wages, they are not terribly harmful and in fact even have slightly beneficial effects both on low-wage workers and on the overall distribution of income. They are far from the best way of redistributing income, however, and there are definite limits to how high the minimum can be raised.

Usually, the important limit is the disemployment effect, but his limitation is overshadowed by others. On balance, disemployment does not seem sufficient to negate the benefits to low-wage workers of higher minimum wages.

But a whole series of other complications does cause problems. Employers resist paying the minimum in the first place. The minimum can have noticeable impacts on overall wages and prices. It can produce undesirable changes in the composition of jobs for young and some experienced workers. And it can provide income support for families who do not need it.

These, more than the disemployment impact make the most persuasive empirical case against raising the minimum wage too sharply.

 

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