The model of minimum wage and informality in Albania

ALTAX Observatory publishes the new study “The Minimum Wage and Informality Model in Albania”, an evidence-based analysis of the relationship between the minimum wage, labor productivity, informality, and employment during the period 2015–2025, as well as the potential effects of increasing the minimum wage to 50,000 lekë from January 2026.

The study combines econometric analyses, counterfactual simulations, and comparisons with Western Balkan countries, using data from INSTAT, the Ministry of Finance, the Social Insurance Institute, OECD, the World Bank, and ALTAX. The analysis is based on OLS statistical models, instrumental variable models, and simulations grounded in international literature, in order to assess the impact of minimum wage policy on the Albanian economy.

What does the study show?

The main finding of the report is that the increase in the minimum wage has not so far produced a statistically significant increase in unemployment, but further increases, if not supported by productivity growth and measures for formalization, may increase pressure toward the informal economy.

The study highlights that:

• Albania has significantly increased the minimum wage over the last decade, while labor productivity has not followed the same pace.
• The Kaitz Index (the ratio between the minimum wage and the average wage) is expected to increase from 45% in 2025 to around 53% in 2026, bringing Albania closer to the countries in the region with the highest level of this indicator.
• The econometric analysis does not identify a direct and statistically significant relationship between the increase in the minimum wage and the increase in unemployment during the period 2015–2025, suggesting that other factors have had a greater influence on developments in the labor market.
• The counterfactual simulation shows that an increase in the minimum wage from 40,000 to 50,000 lekë could increase the informal economy by 1.1 to 3.0 percentage points, if it is not accompanied by measures to increase productivity and reduce the costs of formalization.
• Low-productivity sectors, particularly agriculture and small businesses, appear to be more exposed to a shift toward informality.

The study argues that minimum wage policy should not be assessed only as a social instrument, but also as an economic instrument that must preserve the balance between protecting workers’ incomes, business competitiveness, and the expansion of formal employment.

In the absence of this balance, administrative increases in the minimum wage may encourage the shift of economic activity toward informality, thereby limiting the benefits that public policy seeks to achieve.

What does the study recommend?

The report proposes an evidence-based package of reforms, including:

• linking every future increase in the minimum wage to sectoral productivity and not only to administrative decision-making;
• reducing the costs of formalization through the reduction of labor contributions for low wages;
• strengthening fiscal formalization and the digitalization of payments before further increases in the minimum wage;
• sectoral differentiation of wage policy for low-productivity sectors, providing transitional periods for agriculture and small businesses;
• active policies to increase labor supply, through the return of the diaspora, increased labor market participation, and investments in professional skills.

The study proposes that the public debate should shift from the question “How high should the minimum wage be?” toward a more fundamental question “How can wages be increased without increasing informality and without weakening the competitiveness of the economy?”

The main conclusion is that an increase in the minimum wage is more sustainable when it moves at the same pace as labor productivity, the reduction of formalization costs, and the expansion of the formal economy.

This study aims to contribute to the development of more balanced labor market policies in Albania by providing empirical analyses, simulations, and concrete recommendations for public institutions, social partners, the business community, and the general public.