Minimum wage increases are not enough to protect the poorest from rising prices

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As inflation threatens living standards in the developed world, governments are stepping in to lessen the blow to some of the lowest-paid workers, but their actions will only partially protect those who need it most.

Several European countries are planning anti-inflationary increases in their minimum wages in the coming year.

In Germany, successive increases will bring the minimum wage by almost 10 percent to € 10.45 during the year through July, and the new ruling coalition has pledged to raise it further to € 12. In Portugal, Poland, the Czech Republic and Romania, the statutory minimum wage has increased by 6 percent or more since January. France, whose hourly minimum is already one of the highest in rich economies, will continue to revalue it according to prices (inflation in December was 3.4%). In the UK, the statutory wage floor will rise 6.6 percent in April.

Meanwhile, the EU is considering a bill to ensure that minimum wages – when they apply – are high enough to be “adequate”, or at least 60 percent of national median earnings.

This is a stark reversal of policies on the eve of the 2008 financial crisis, when EU leaders made an inappropriate call for wage moderation to prevent mounting price pressures.

“This would not have happened a few years ago,” said Stefano Scarpetta, director of the Directorate for Employment, Labor and Social Affairs at the OECD. “This time around, we are investing a lot of money in the economy and there is a concern that it should go to those at the bottom of the ladder.”

The problem is that governments rely too much on one tool – the minimum wage – which will only protect a portion of those who are vulnerable.

Market forces are providing a tailwind, with labor shortages in some low-wage sectors, forcing employers to compete fiercely for workers for the first time in years. In the United States, although Joe Biden has not won backing for his ambition to nearly double the federal minimum wage, wages have risen the fastest for those in the lower rungs of the labor market – surpassing the inflation over the past six months for the third of workers with the lowest earnings.

But economists warn that action is needed on a much broader front to protect households from a painful cost-of-living crisis.

A minimum wage was a good way to establish a social norm, but “not a very targeted measure to fight poverty”, argued Scarpetta. Many of those who receive it live with a partner who earns more and when the wage floor increases, workers can often lose their benefits or pay higher taxes as a result.

A higher minimum wage can also cause employers to hire people on shorter hours or on less secure terms – for example, the liberal use of zero hour contracts in the UK hospitality industry – and only affects people near the bottom of the income distribution.

“It only helps those with the lowest wages. It’s not going to help create a middle class, ”said Patrick Belser, senior economist at the International Labor Organization. The share of workers’ earnings will only increase in countries that also have effective collective bargaining agreements, he said.

Laurence Boone, chief economist at the OECD, argued that “traditionally, policies to tackle inequalities have focused on skills and wage setting – minimum wages, collective bargaining”. But now governments need to take a closer look at other issues, especially competition policy, she said.

A new OECD study has found that up to a third of overall pay inequality is due to the wage differentials that different companies pay for workers with similar skills. Workers are often unable to travel even when better wages are offered elsewhere due to restrictions imposed by their employers, such as non-competition contractual clauses.

Addressing this would mean legislative crackdown – as the US and UK governments have pledged to do – and force competition authorities to examine the effects of mergers on workers, as well as consumers.

The stagnation in living standards was “not the fault of the minimum wage,” Belser said. “It’s the absence of other policies.

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