Busting the Myth: The Impact of Increasing the Minimum Wage: The Experience of Romania

Frank Heemskerk, Liviu Voinea and Alexandra Cojocaru

No 8632, Policy Research Working Paper Series from The World Bank

Abstract: This paper discusses the impact of a gradual, pre-announced significant increase of the minimum wage during 2013?16 in Romania. The main finding is that the positive effects prevail when the starting level of increase in the minimum wage is very low and the economy is in a negative output gap. Evidence shows that employment has increased, mainly at the minimum wage level, therefore making a shift toward a more balanced wage distribution. This measure might have contributed to a decrease of the shadow economy and a decrease in the share of people at risk of poverty. The impact on inflation was very limited, and the impact on the public budget was positive. Moreover, firms'profits were not affected, as the negative impact of the measure on unit labor costs and exports was limited.

Date: 2018-10-31
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