This is the third blog in a series about Business Ready (B-READY), a World Bank flagship report that assesses the global business environment. The first blog, Data for reforms: Leveraging the B-READY 2024 report for enhanced business environments, offered guidance on how to effectively navigate and leverage B-READY data to enhance business environments; the second blog, Data-driven transparency: The need for easy access to laws and regulations for businesses, explains the importance of transparency for businesses to thrive.
Minimum wage laws play a crucial role in addressing labor market distortions, ensuring fair wages, and fostering economic development by reducing poverty and inequality. For businesses, labor is a vital factor of production. The B-READY project highlights that balanced labor regulations benefit both firms and workers, as detailed in the Methodology Handbook and on the B-READY website. This blog focuses on one aspect of the broader Labor topic: how minimum wage is incorporated into the B-READY methodology, offering insights to address common stakeholder inquiries.
Following the overall B-READY structure, the Labor topic consists of three pillars: Pillar I measures the Quality of Labor Regulations, Pillar II evaluates Adequacy of Public Services for Labor, and Pillar III focuses on Operational Efficiency of Labor Regulations and Public Services in Practice. Regulations on minimum wage are included in Pillar I, under two categories. The first one- Workers’ Conditions focuses on the worker’ perspective by measuring four minimum wage attributes: (i) existence of minimum wage in the private sector (ii) criteria for determining the minimum wage level, (iii) minimum wage update process, and (iv) social consultation for establishing or setting a minimum wage. The second category – Employment Restrictions and Cost measures the minimum wage rate from the point of view of firms. The four workers protection measures (scored as social benefits) carry the same weight as the firm flexibility measure of minimum wage rate (Figure 1).
Figure 1: Balanced approach when measuring minimum wage policies
The minimum wage indicators are grounded in internationally recognized standards and practices, emphasizing fair and sustainable minimum wage systems.
- The perspective of workers is covered by the Minimum Wage Attributes subcategory. Designed based on ILO Minimum Wage Fixing Convention, 1970 (No. 131) and Minimum Wage Fixing Recommendation, 1970 (No. 135), among other relevant ILO instruments on wages, it measures the laws and regulations governing the minimum wage design process, including consideration of economic factors, the need for social dialogue, and regular update process.
- The perspective of employers is captured by the Minimum Wage Rate subcategory. It considers the above-mentioned ILO Convention and Recommendation, and other relevant ILO instruments on wages, but also literature and consultation with experts on the appropriate minimum wage level for private sector development. It reflects the premise that the minimum wage level may influence firms’ profitability, productivity, and workforce management.
How does B-READY score the minimum wage rate?
The B-READY team analyzed minimum wage levels from a private sector development perspective. (brief forthcoming). The prominent academics consulted by the B-READY team, as well as the literature, consider the minimum-to-median wage ratio as the best measure to assesses the appropriateness of the minimum wage. However, data on median wages are scarce and not annually updated, therefore the team used GDP per capita to establish a minimum wage-to-GDP per capita ratio. The ratio should be carefully balanced, as setting it too high or too low can have negative consequences. If the minimum wage is set too high, it may become unaffordable for employers, leading to labor market rigidities and discouraging hiring, including in the formal sector, which increases informality, especially among vulnerable groups. On the other hand, if the ratio is set too low, it could contribute to increased poverty, and inequality, coupled with lower productivity; thereby, subdued economic growth.
A Cumulative Distribution Function (CDF) transformation is then applied to assign scores based on this ratio. Economies with a ratio below the 5th percentile (19.45) received a score of 100, while those with a ratio above the 95th percentile (161.03) received a score of 0. For B-READY 2024, half of the economies have a ratio below 50, scoring around 90 or higher (Figure 2).
Figure 2. Scoring curve for ratio of minimum wage to GDP
Consider three different country contexts (Table 1):
Scenario A: For economies without a minimum wage, the score for the Minimum Wage Attributes subcategory is zero as there is no workers protection. However, the same absence of minimum wages reduces the regulatory burden on businesses, resulting in a maximum score in the Minimum Wage Rate subcategory.
Scenario B: Economies with strong policies around establishing minimum wages score well in the Minimum Wage Attributes subcategory, but they may receive lower scores in the Minimum Wage Rate subcategory if the minimum wage rate is relatively high.
Scenario C: To achieve high scores in both subcategories, an economy should establish a minimum wage through social consultation and have clear criteria-based regular update process. At the same time, the wage level should be sustainable for businesses, allowing them to operate without resorting to layoffs, which can harm employment levels and increase informal work.
Table 1. Example of scores
The B-READY project offers a new approach to evaluating the business environment by balancing employer challenges with worker well-being. It provides policymakers data and insights to create labor policies that enhance firm productivity while ensuring workers’ protection and inclusivity.
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