What makes for a good minimum wage setting process? Lessons from Greece

Minimum wages affect many workers around the world: 90 percent of all countries have a minimum wage and globally, over 300 million workers are directly affected. Establishing minimum wages can also have an indirect impact on informal workers, most of whom live in developing countries, as their wages are often set based on those in the formal sector. 

The objective of the minimum wage is to ensure that all workers receive fair compensation for their labor. However, if it is set above the marginal productivity of low-skilled labor, the minimum wage can discourage growth and job creation and increase incentives for informal economic activity. The challenge for minimum wage policy, then, is to set the level in a zone where both social and economic objectives are considered. 

Economists, policy analysts, and practitioners focus on the level of the minimum wage. Far less attention is paid to the process for setting the minimum wage , which is extremely important for ensuring that wage adjustments achieve their objectives. In most countries, including almost all developing countries, the minimum wage is set by the government. The details of the process can vary in terms of how often adjustments are made, whether stakeholders are consulted, and how economic and labor market trends should be considered in setting the new minimum wage. 

So what makes for a good minimum wage-setting process? For the past two years, we worked with the Greek government to improve the capacity to implement their minimum wage-setting process. Their experience can help guide the process in other countries, regardless of level of development. Our work highlights two important ingredients for effective minimum wage-setting: that the process is inclusive and is evidence-based.  

An inclusive process is key
An inclusive process ensures that all stakeholders have opportunities to participate. This means extending consultations to include workers and employers who typically may not have the opportunity to voice their views. 

Government agencies, employer organizations, trade unions and other worker organizations, and research institutions can all offer different perspectives that can contribute to the setting of the minimum wage. We saw this in the consultation preceding the last minimum wage adjustment in Greece in 2019: The Central Bank considered macroeconomic aspects related to the minimum wage; the Public Employment Agency highlighted fiscal implications related to social benefits linked to the minimum wage; and employer and worker organizations focused on specific concerns related to their constituencies. 

Nonetheless, providing for the involvement of stakeholders does not guarantee that the process will actually be inclusive. This requires that their inputs are duly considered in the final decision.

Seek data and evaluation
The minimum wage-setting process should also encourage evidence-based deliberations. Three types of analysis are relevant. The first involves monitoring trends and prospects for key labor, social, and economic indicators, such as the share of workers affected by the minimum wage, the ratio between the minimum wage and average wages, unemployment, in-work poverty, productivity, and GDP growth. The second is to simulate how different minimum wage adjustments would likely affect key outcomes of interest, such as employment, earnings and total labor costs, output, and informality. The third is to periodically conduct evaluations looking into the actual impact of previous adjustments on key indicators. All of this analysis needs to be disaggregated to understand the likely impacts of a minimum wage adjustment on different types of workers and different sectors. 

But to do this, stakeholders both inside and outside government need access to data that is timely and relevant. This is a constraint in many countries and Greece is no exception. 

In the case of minimum wage analysis, administrative data can be particularly important. Compared to survey-based data, employment registries and social insurance and tax files can be more up to date, less affected by biases resulting from non-response or self-reporting, and can allow for more disaggregated analysis. 

Making administrative data available for research is not an easy task, and requires the right legislation, institutional arrangements, and expertise to share data in a timely way while protecting confidentiality. 

Special considerations for developing countries
For developing countries, informality and limited compliance constitute specific challenges in assembling the evidence for minimum wage setting. Increases in the minimum wage can lead to more informality and this needs to be taken into account. Similarly, analyzing how minimum wage changes are likely to affect compliance is important. 

However, measuring informality and compliance is not an easy task. Survey data can capture the informal economy and non-compliance to some degree but suffers from different biases, as we have noted. Data from labor inspections can provide some evidence on compliance but is not representative, especially in developing countries. Even the most developed countries struggle with measuring informality and compliance. 

To ensure a process that results in a fair and effective minimum wage, countries must commit to genuine social dialogue, capacity building, and data development and accessibility.