Chapter 5: Setting and adjusting minimum wage levels

5.3 The needs of workers and their families

To be meaningful, minimum wages have to be set at a level that covers the needs of workers and their families, while taking into account economic factors.

Assessing whether existing rates are sufficient to meet the needs of workers and their families can be challenging. First, needs of workers and their families cannot be considered in a vacuum; they must be understood in relation to a country’s level of economic and social development, taking into account the views of social partners. Secondly, whether a minimum wage is sufficient to cover family needs depends on the size of one’s family, which varies across workers. It also depends on how many family members earn the minimum wage, and on the local cost of living. 

Because of all these reasons, adequate minimum standards of living should be ensured through the combination of a minimum wage and social security measures. Yet some useful benchmarks can be used for the purpose of fixing minimum wages. 

Estimating absolute and relative needs

Absolute estimates of needs of workers and their families can be constructed by estimating the average cost of basic but decent life style for a worker and his or her family by adding up the cost of food, housing, and other essential expenses like for health, education of children, and participation in the social life of the community. This is the approach usually taken in estimating national poverty lines1 or "living wage" thresholds.

Relative needs and relative poverty lines are defined as some proportion - sometimes 60 per cent - of median household income. Relative poverty lines better capture the “cost of social inclusion and equality of opportunity in a specific time and space”2 and are usually preferred in more developed economies.

Adjusting for increases in prices

Increases in the general level of prices and the cost of living is the most frequent consideration in minimum wage adjustments. This is because inflation erodes the real value of the minimum wages over time. One indicator to capture the changes in prices is the consumer price index (CPI). This index tracks the evolution of prices for a basket of goods and services purchased by consumers over time. It is well established in most countries. Monthly figures are usually available after a short period of time.

However, sometimes countries publish different CPIs. Some countries may wish to consider a CPI that is computed for the poorest households since they are among those most likely to be affected by the minimum wage. In particular, this CPI has a special relevance in cases where food prices have grown more rapidly than average prices since poor households usually spend a larger share of their income on food.

Because past inflation is not necessarily going to be reproduced in the future, an alternative is to use expected future inflation. However, as with most forecasts, estimates of future inflation usually differ from the effective inflation rates. An ex-post “corrective adjustment” can thus be introduced in case the estimates are significantly different from the effective rates.

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1  National poverty thresholds may be determined on the basis of various methods. Some examples are described in Haughton, J.; Khandker, S.R. 2009. Handbook on poverty and inequality (World Bank, Washington DC).
2  Jonathan Bradshaw; Yekaterina Chzhen; Gill Main; Bruno Martorano; Leonardo Menchini; Chris de Neubourg (January 2012). Relative Income Poverty among Children in Rich Countries (PDF) (Report). Innocenti Working Paper. Florence, Italy: UNICEF Innocenti Research Centre. ISSN 1014-7837