Time for a raise?

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Low pay and rising inequality were policy challenges even before the onset of the financial crisis, and these issues have become more pertinent after the downturn. Against this backdrop, the debate around minimum wages has been building.

The first statutory minimum wage was introduced in New Zealand in 1894 and 27 out of 35 OECD countries use this tool. Minimum wages vary widely across countries. France, Chile, Turkey and New Zealand have the most generous minimum wages across the OECD, with these around 60% or more of domestic median earnings.

The least generous statutory rates can be found in the US, Spain, Japan and Mexico, where minimum wages are between 35-40% of median earnings. Minimum wages stagnated after the financial crisis, mirroring trends in the broader labour market.

The average OECD statutory rate increased just 0.2% annually in real terms between 2010 and 2013. More recently we have seen better real pay growth for minimum wage earners, albeit supported by weak inflation. Is it time for a more material rise in minimum wages?

The classic counter to this argument is that high minimum wages can damage employment. However, empirical evidence suggests that minimum wages need not have large negative effects on jobs, if appropriately set.

In particular, minimum wages should be carefully calibrated according to local growth, productivity, employment and living costs. Differentiated wage floors, such as lower rates for young workers, can also help address these employment concerns. Finally, reduced labour taxes can help mitigate the effect of rising minimum wages on firms.

Overall, the scope to raise minimum wages will depend on local economic, tax and labour market conditions/institutions. However, this is not the only tool at policymakers’ disposal. There is a range of initiatives that can be used alongside (or instead of) minimum wages to support those on lower incomes.

Indeed, many are likely to be more effective in addressing poverty. These include more generous tax and benefit allowances, structural reform aimed at boosting aggregate employment and education/training.

Policymakers should focus on improving the overall package for those on low incomes, rather than focusing on minimum wages.

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