Minimum wage systems differ very much across countries and range from simple to very complex. According to an ILO report, out of the estimated 327 million wage earners who are paid at or below the minimum wage, 266 million people around the world earn less than the current hourly minimum wage, either because they are not legally covered or because of non-compliance. Some studies show that minimum wages reduce employment in developing countries. We have discussed the topic with some experts from a developing country. Check their opinions below.
Minimum wages in developing countries: helping or harming workers?
“Changing minimum wages in poor countries is an acute problem. Sometimes this problem lies both on the economic and on the political plane. In Ukraine, at the beginning of 2021, the level of the minimum wage is very low (compared to many countries in Eastern Europe). The law established the minimum wage in January 2021: about US$212 which by December 2021 should increase to US$230. It can be assumed that such a low level of minimum wage will not have a significant impact on the labor market. Therefore, labor migration to European markets from Ukraine will continue. The main reason is the higher average wages in the labor market in Europe. However, it should be noted that the minimum wage significantly affects the taxation system in Ukraine. We are talking about the Unified Social Contribution. The revenue from the collection of this in 2020 amounted to a significant amount – $ 10.4 billion. Over the past few years, the minimum wage has grown steadily and this trend is likely to continue. The main factor for this is the legalization of shadow wages. The minimum wage rate changes every year. We will be able to already know the indicator for 2022 in May of this year.”
“I see no positive impact of the minimum wage regulation apart from a purely fiscal one. The Ukrainian authorities routinely use this instrument in order to squeeze more payroll tax and PIT, as well as the so-called “Unified tax” for micro-businesses defined as a percentage of the minimum wage. At the same time, such moves please those uneducated workers who still believe the government should set their wages, just like under Communist times. The minimum wage hikes mostly increase unemployment (we have evidence for this in Ukraine too) and inhibit entrepreneurship. At the same time, the competition from entrepreneurs is the only real guarantee for both job creation and decent pay because in fact only the competition for the workforce really drives the wages up. And it does work, unlike the government regulations that can be circumvented or just ignored for a modest bribe. The only case where such regulations are justified is monopsonic enterprises having dominant power of the job market – hence, those creating “one-company towns”. Ideally, most of the labor regulations, including the minimum wage, should be limited to such firms and applied as a part of anti-monopoly regulations. I can supply some quantitative results when available, hopefully soon.”
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