The minimum wage

Can minimum wages help rebalance the economy?

Minimum wages can improve the lives of low-paid workers while also rebalancing national economies.

Article | 12 August 2013
Current research shows that minimum wages can be a powerful tool for supporting decent work goals and can be a crucial complement to the strengthening of social protection floors and poverty alleviation efforts.

In recent years, there has been growing interest in the role of minimum wages in improving the lives of low-paid workers, and also in rebalancing national economies. In Brazil, a stronger national minimum wage and “Bolsa família” – a conditional cash transfer programme – are two of the most widely credited measures to explain the reduction of poverty, which has fuelled the country’s economic engine.

© ILO Photo/K. Cassidy
In China, coordinated minimum wage increases across provinces have been a key part of a strategy to reduce inequality and rebalance the economy, encouraging stronger domestic consumption in the face of falling export demand and reduced scope for investment-led growth.

In the United Kingdom, where minimum wages were introduced at the beginning of the twentieth century, abolished in the 1980s and reinstated in the 1990s, a survey of political experts has identified the national minimum wage as a successful Government policy.

In the United States, a higher minimum wage has come to be seen by many as a way to reduce poverty and inequality and provide a stimulus to the economy with potentially favourable fiscal effects, including through reduced costs of anti-poverty programs and increased tax revenue.

Minimum wages, if set and operated effectively, can help to reduce inequality and support aggregate demand by transferring resources to low-paid workers. This can have a positive effect on demand because low-paid workers have a greater tendency to consume goods and services with the increased wages.

Higher wages can also encourage investment since businesses will only invest if they anticipate increased demand from consumers. Higher income from minimum wages among the low- and middle-income groups can lead to a virtuous cycle of greater consumption and investment and also create more employment opportunities.

Overall, the impact of a minimum wage depends not only on how it affects consumption and investment, but also on how it affects competitiveness and whether it affects net exports and, if so, by how much. The strategy of raising the minimum wage may be more challenging for small, open and developing economies that derive most of their demand from abroad, if their exports are very sensitive to prices, that is, if they compete primarily on price rather than quality. In countries where domestic consumption is a large part of the economy or where export industries are moving up the value-added chain the environment is likely to be more permissive.

An oft stated risk of raising minimum wages is the notion that it might hurt employment creation if it is set too high. However, recent studies and surveys indicate that in most cases there are only small or no negative employment effects of minimum wages. For example, a review of 64 recent studies on the impacts of minimum wages in the United States concluded that there was little or no evidence of a negative employment impact.

As argued above, if minimum wages are set appropriately and operated effectively, then low paid wage earners will benefit. The transfer of resources to low-paid workers could contribute towards sustaining household consumption and overall aggregate demand and output, especially important during times of crisis.