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1 minimum wages after the crisis: Making them pay OECD 2015 1 FOCUS on minimum wages after the crisis: Making them pay May 2015 Directorate for Employment, Labour and Social Affairs minimum wages are common but controversial. Three out of four OECD countries use them, and supporting low-wage earners is widely seen as important for promoting inclusive growth. But views differ about whether such support is best provided through minimum wages, or closely related policies, such as government transfers. This policy brief considers three aspects that are central for a balanced assessment of policy choices: The cost of employing minimum -wage workers, their take-home pay, and the number of workers affected. Strong interest in minimum wages after the crisis Low pay and in-work poverty were already major policy challenges before the onset of the economic crisis.

2 Since then, these challenges have often become more acute as pay levels have fallen or stagnated in many OECD countries. Although economic output is now well above 2007 levels in a large majority of countries, employment and wage gaps persist, especially amongst disadvantaged groups. In more than one out of three OECD countries, pay in the lower part of the wage spectrum was still lower in 2013 than it had been six years Both the recent crisis and the longer-running trend of rising inequality have added new momentum to minimum -wage debates. Legal minimum wages are a government s most direct policy lever for influencing wage levels, especially for workers in a weak bargaining position. They also serve as a basic labour standard, alongside working-hours regulations and related provisions to ensure basic job-quality standards.

3 Currently, 26 out of 34 OECD countries have statutory minimum wages (MW) in place (Figure 1a), as do Colombia and Latvia, who are seeking OECD membership, and a majority of emerging Since 1990, nine OECD countries, including most recently Germany, introduced a legal minimum . Legal minima exist alongside collectively agreed wage floors, and can sometimes substitute for them when collective bargaining coverage is 1. OECD Earnings Distribution Database. 2007-2013 comparison is for real-term earnings at the 20th percentile. 2. Information on non-OECD countries: ILO NATLEX database, and references listed under Further reading at the end of this brief. In the eight OECD countries that do not have a statutory minimum , a large part of the workforce is covered by sector-level collective agreements and the wage floors they specify (Nordic countries, Austria, Italy and Switzerland).

4 4 1. Statutory minimum wages in the OECD area: Widespread, but much lower in some countries than in others (a) Legal minimum wage in OECD countries, 2015 3. See Garnero, A., S. Kampelmann and F. Rycx (forthcoming), minimum wage systems and earnings inequalities: Does institutional diversity matter? , European Journal of Industrial Relations. 4. Austrian social partners have agreed a collectively agreed uniform minimum wage as of January 2009. 2 minimum wages after the crisis: Making them pay OECD 2015 (b) minimum -wage levels before taxes: percentage of median wage, pre-crisis and latest Notes: Levels refer to full-time workers. Panel (b) also shows data for Colombia and Latvia, who are currently seeking OECD membership. * Germany: minimum -wage level 2015 is expressed in percentage of the projected 2015 median wage.

5 Projections are based on earnings data from the OECD Economic Outlook database. Source: OECD Earnings and minimum Wage databases, MW levels vary markedly across countries. This is often shown by comparing MW to wages in the middle of the wage spectrum (the so-called median wage ). According to this measure, MW range from 40% or lower in the Czech Republic, Mexico, United States, Estonia and Japan, to more than 60% in Slovenia, France, Chile and Turkey. At more than 80% of the median wage in the formal sector, the MW in Colombia is much higher than in any OECD country (Figure 1b). In recent years, policy-makers in many OECD countries have adjusted MWs in a context of high and increasingly persistent unemployment, stagnant or even declining average wages and, frequently, falling incomes especially among the poorest families.

6 In the average OECD country, real hourly wages grew at an annual rate of only over the four years to 2013, and half of the workers who stayed in their jobs suffered real wage cuts in some post-crisis Greece reduced MW 5. OECD (2014), Sharing the pain equally? Wage adjustments during the crisis and recovery , OECD Employment Outlook, 54-78. levels as a crisis-related measure and the minimum -to-median ratio also declined significantly in Ireland, Spain and Turkey. But MW in other countries have sometimes slowed or prevented real wage losses for the lowest-paid workers. The biggest relative increases between 2007 and 2013 occurred in Latvia, Slovenia and Poland, where the gap between minimum and median wages narrowed by more than ten percentage points.

7 Commonly used country comparisons such as those in Figure 1b provide useful pointers on MW trends across countries. But wage-floor comparisons based on gross MW amounts alone say relatively little about aspects that are crucial for a fact-based discussion of the pros and cons of MW policies: the cost of employing MW workers (the minimum labour cost ), their take-home pay, and the groups that are most affected by MW provisions. minimum wages after the crisis: Making them pay OECD 2015 3 Supporting workers while keeping employer costs in check: The role of taxes and transfers While MW are intended to support low-wage workers, the cost of employing them can be at the heart of concerns that legal minima might reduce employment, or damage the international competitiveness of domestic firms relying on low-skilled labour.

8 Across countries, absolute values of hourly minimum wages indeed vary enormously, from less than three US dollars per hour after taxes and social contributions in Mexico, Latvia, Chile and Estonia, Hungary and the Czech Republic to over nine dollars in Luxembourg and Australia (Figure 2). A large part of those disparities reflects country differences in average wage and productivity levels more broadly. But tax burdens play a significant role as well. 2. Very big differences in net minimum wages Hourly minimum wage before and after taxes, 2013, in US dollars at purchasing power parities Notes: Social contributions also include any mandatory payments to private insurance for health, retirement pensions, etc. Full-time worker in a single-person household earning the minimum wage at the standard (adult) rate.

9 Full-time refers to statutory full-time hours in each country and includes statutory additional payments, such as holiday pay. See Fact Sheet on last page for country-specific details. USD amounts are calculated using purchasing power parities for private consumption. * minimum -wage level in Germany is for 2015. See Figure 1 for calculation details. Source: OECD tax-benefit models , minimum -wage database, National Accounts database, Even at the very bottom of the wage ladder, taxes and social levies can strongly reduce take-home pay. At the same time, taxes and other mandatory non-wage labour costs also push up the cost of employing minimum -wage workers. By driving a wedge between labour costs and workers take-home pay, the size of the overall tax burden has implications for how well MW perform at supporting low-wage workers and low-income families, while avoiding significant job losses.

10 On average across the OECD, the total burden from income taxes, social contributions and related mandatory payments amounts to one third of the gross MW, with approximately equal shares paid by employer and employee (Figure 3). However, in some countries, the total tax wedge can be 45% or more (Czech Republic, Germany, Poland, Estonia, Slovak Republic, Latvia and Hungary). In these cases, tax policy may be as important a driver of net wages and labour costs as headline MW levels. 4 minimum wages after the crisis: Making them pay OECD 2015 Some countries have adopted specific measures to reduce the gap between the amounts an employer pays and the take-home pay that the worker receives. To lower employers costs, or to reduce risks of employment losses following MW hikes, some have introduced sizeable payroll-tax rebates for firms employing MW workers.