Romania’s Minimum Wage Growth: Economic Gains and Employment Trade-offs

The World Bank study analyzes the impact of minimum wage increases in Romania, showing modest wage gains but potential job losses, especially among young and low-skilled workers. It recommends gradual wage adjustments and stronger safety nets to balance income growth with employment protection.

A recent World Bank paper, developed by Monica Robayo-Abril, Madalina Zamfir from the Romanian Ministry of Finance, and Marcin Wronski from SGH Warsaw School of Economics, examines the aggregate and distributional effects of minimum wage increases in Romania. Using a combination of survey and administrative tax data, the paper explores how minimum wage policies impact employment, wages, and income inequality in the country. Over the past decade, Romania has experienced a sharp rise in its statutory minimum wage, positioning it as one of the EU's mid-ranking nations in terms of the minimum-to-median wage ratio. This wage growth was implemented to improve the livelihoods of vulnerable workers, but it also carries significant risks, particularly concerning employment prospects for low-wage and young workers. The report uses simulations to evaluate the effects of two main scenarios: one where the minimum wage is tied to inflation and another where it is raised to match the living wage, which represents the amount necessary to cover both food and non-food components of a basic consumption basket.

Inflation-Tied Wage Increases: Modest Gains but Employment Risks

The paper highlights that minimum wage increases can have both positive and negative consequences, depending on the demographic and sector of the economy. When minimum wages are tied to inflation, the study finds that about 13% of full-time formal employees, mostly in lower-wage brackets, would be affected. Short-term wage gains are projected to be modest, with an estimated 2.8% increase in net labor income for the affected group. However, the risk of job loss, particularly for younger workers, could offset these gains. In the short run, around 5.2% of workers in this group may lose their jobs, while this figure could rise to 7.6% in the long term. These employment losses are expected to be concentrated among the youngest workers, who typically have less experience and lower skill levels. Overall, the simulation suggests a slight reduction in labor income inequality, as the wage gap between low-wage and higher-wage workers narrows, but this effect is limited due to job losses among the most vulnerable groups.

Living Wage Scenario: Higher Income, Greater Job Losses

In the second scenario, where the minimum wage is raised to match the living wage, the potential for higher wages is more pronounced. However, this scenario also carries a greater risk of employment reductions. The study estimates that raising the minimum wage to cover basic living costs would affect 16% of full-time employees. While these workers would see a significant increase in their earnings, with wages rising by over 13% for those who remain employed, the disemployment effects are projected to be even larger than in the inflation-indexed scenario. Around 7.7% of workers could lose their jobs in the short term, and this could climb to over 11% in the long term. Again, the youngest workers are likely to bear the brunt of these job losses. Despite these challenges, the increase in wages for those who keep their jobs would lead to a more substantial reduction in income inequality, with the Gini index falling significantly.

Sectoral Sensitivities and Regional Disparities

Sectoral and regional variations play a critical role in determining the impact of minimum wage increases. Certain sectors, such as accommodation and food services, are more sensitive to wage hikes, with a higher proportion of workers earning the minimum wage. In these sectors, up to 50% of employees could be affected by a wage increase, which could lead to significant job losses if firms are unable to absorb the higher labor costs. Similarly, the geographical distribution of wage effects is uneven. Regions like Suceava, where a larger share of the workforce earns near the minimum wage, are expected to experience higher job losses compared to more economically prosperous regions such as Bucharest. The study finds that Suceava could see wage increases of up to 2.2%, but also job losses of nearly 1.7%, indicating the complex trade-offs involved in adjusting minimum wages.

Balancing Wage Growth with Employment Protection

The research underscores the importance of carefully calibrating minimum wage policies to avoid unintended consequences. While raising the minimum wage can improve the income of low-wage workers, the risk of job loss, particularly for younger and less-skilled workers, must be mitigated through incremental wage adjustments and complementary policies. The paper suggests that tying minimum wage increases to inflation may be a more prudent approach in the short term, as it allows for wage growth without triggering large-scale employment losses. However, the authors also recognize that aligning the minimum wage with living wage levels is a long-term goal that could reduce poverty and inequality more effectively, provided that the labor market can absorb the higher costs without significant disruptions.

Stronger Safety Nets for Vulnerable Workers

Additionally, the study highlights the need for strong social safety nets to support workers who may lose their jobs as a result of minimum wage hikes. By balancing wage increases with measures to protect employment, Romania can achieve a more equitable distribution of income without jeopardizing the economic stability of vulnerable workers and sectors. The key takeaway is that minimum wage increases should be implemented with caution and backed by policies that ensure workers do not fall into unemployment, creating a sustainable and fair economic environment for all.