A European Minimum Wage: Implications for Poverty and Macroeconomic Imbalances
IMF Working Papers, May 22, 2020
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Bibliographic details
- Authors: Enrica Detragiache, Christian H Ebeke, La-Bhus Fah Jirasavetakul, Koralai Kirabaeva, Davide Malacrino, Florian Misch, Hyun Park, Yu Shi
- Published: May 22, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513545073.001
Findings on poverty
- A hypothetical European Minimum Wage (MW) set at 60 percent of each country’s median wage would reduce in-work poverty.
- The MW would have limited effects on overall poverty because many poor households do not earn a wage near MW.
- Higher unemployment, higher prices, and a loss of social insurance benefits may erode the direct poverty-reducing benefits of MW.
Findings on competitiveness and macroeconomic imbalances
- The MW increase needed to reach the European standard would be larger in euro area countries with excessive external surpluses.
- The associated real appreciation in those surplus countries should help curb existing imbalances.
- A few countries with already weak external positions would experience an undesirable real appreciation.
Mechanisms and risks
- Direct benefits to in-work poor rely on workers earning wages near the MW level; households without such wages receive limited direct gains.
- Offsetting forces include:
- higher unemployment,
- price increases,
- loss of social insurance benefits.
- Distributional and competitiveness effects vary across countries depending on existing wage levels and external positions.
Policy implications and considerations
- A uniform MW set at 60 percent of median wages could be a tool to reduce in-work poverty but is not a comprehensive solution to overall poverty.
- Policymakers should weigh:
- labor market responses (including potential unemployment),
- inflationary pass-through to prices,
- interactions with social insurance systems that may reduce net gains for households.
- In the euro area, MW harmonization could help rebalance external surpluses through real appreciation in surplus countries, but it risks worsening external competitiveness in some deficit countries.
IMF Working Paper — "A European Minimum Wage: Implications for Poverty and Macroeconomic Imbalances" (May 22, 2020).
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