Chapter 5: Setting and adjusting minimum wage levels

5.6 Should a mathematical formula be used?

Some countries have adopted a mathematical formula for the periodic adjustment of their minimum wages. This can increase predictability, avoid having to hold discussions on the adjustment every year, or remove the possibility for sudden or extraordinarily large increases motivated by political rather than technical factors.

However, if mathematical formulas are used, these should be adopted after full consultation with social partners.

Is indexation a good idea?

If minimum wages are automatically uprated to compensate for all past inflation, this would, in principle, guarantee the real level (purchasing power) of minimum wages.

However, such “indexation” mechanisms have been questioned in recent times as they were considered to introduce “inflationary inertia” under some circumstances. That is, the reproduction of past inflation in wages and other prices can become an obstacle for reducing the current inflation rate.

During the 1980s, European countries such as Denmark, Austria, Belgium, Italy and France modified or even eliminated this formal link.1 At the same time, a similar process took place in Latin American countries that were suffering much higher rates of inflation. Since then, countries tend to be more cautious of adopting mathematical formulae to uprate minimum wages automatically.

More complex formulas

It must be stressed that a minimum wage that is adjusted only on the basis of a change in the cost of living would result in a constant minimum wage in real terms, and minimum wage-earners would not see their real wages increase even in circumstances of economic growth. Most countries which use a formula therefore also include another economic factor, such as economic growth or the growth in labour productivity.

Below we provide some example of countries which have adopted a minimum wage formula. These country examples illustrate the diversity of criteria used in order to determine minimum wage adjustments.
Note that it is almost impossible for a mathematical formula to incorporate all the key considerations. It is not unusual therefore, to see that the application of a formula is made conditional on a number of situations, or that, in addition to the formula and additional considerations, there is space for social dialogue or for reaching a different decision on the basis of political considerations.

1 Eyraud F.; Saget, C. 2005. The fundamentals of minimum wage fixing (Geneva, ILO).