Increase of minimum wage

What did North Macedonia learn from reforming the minimum wage?

The country in the Southeast of Europe went for a bold reform of the minimum wage system in 2017 and asked the ILO for support in assessing the impact of this policy on income equality and employment. A new ILO study provides encouraging findings.

News | 08 August 2019

Four out of five EU member countries set the minimum remuneration that any employer is required to pay to workers. Minimum wages now exist in 90 percent of the 187 ILO member states. Despite being a widely used social policy intervention, minimum wages and especially the setting of an adequate level are still controversial. Supporters say it increases the standard of living of workers and reduces inequality. Opponents of the minimum wage claim that it increases unemployment, particularly among the unskilled workers, and can increase undeclared work. Empirical evidence overall says that minimum wages have been successful in improving the wages of the lowest paid with very small or no negative effects on employment if introduced at cautious levels and incremental steps.

In 2017, the newly elected Government of North Macedonia went for a bold reform of the minimum wage system introduced for the first time in 2012 in the Western Balkan country. The reform included a 19% increase of the minimum wage and introduced the same wage in all sectors. The government also abolished exemptions previously allowing lower minimum wages for industries heavily relying on low skilled workers, for instance the textile sector. Following the good practice of monitoring the effects of minimum wages, the government asked ILO to do an assessment of the reform quantifying the effects of the increased minimum wage on income equality and employment.

The study shows that the increase of the minimum wage was high by international comparison. Compared with the EU, the level of the new minimum wage is relatively high in relation to the average wage. After the reform, the ratio is at 65% for North Macedonia while in most EU countries it is between 45% and 60%. With regard to outreach, the reform was also significant. 15% of all wage employees in North Macedonia received the new minimum wage.

The study provides solid evidence that the introduction of the minimum wage was successful in reducing wage inequality. Results show a large increase at the lower end of the wage distribution, while the middle and upper part of the wage distribution remained intact. Prior to the reform 14.7% of all wage employees earned less than 2/3 of the median wage often taken as a threshold for defining low wage categories. After the MW increase, only 4.3% of the wage earners fell into this category, which is a dramatic drop by any standard.

Other measures of inequality show in a similar direction. The poorest 10% of wage earners saw an almost 40% increase in their share of all wages received (before the reform the poorest 10 percent received 3,6% of all wages received in the country, after the reform this share increased to 4.6%, while the EU average is 3.6%). The poorest 10 percent of female workers could even double their share of all wages received (from 2.9% to 5.9%).

The study did not find any evidence that the new minimum wage had a negative impact on employment or higher degrees of informality. This finding may signal that the increased minimum wage was not a large burden for employers, but does not say that planned further increases will not impact employment. The government plans a further 30% increase of the minimum wage until 2020.

The findings of this study only show the short-term effects of the minimum wage increase. The longer term effects will have to be monitored closely to catch any further positive or negative impact.

For more details, the ILO technical report on “Assessment of the economic impacts of the 2017 increase in the minimum wage in North Macedonia” is available online in English.