Elevator pitch
The minimum wage has never been as high on the political agenda as it is today, with politicians in Germany, the UK, the US, and other OECD countries implementing substantial increases in the rate. One reason for the rising interest is the growing consensus among economists and policymakers that minimum wages, set at the right level, may help low paid workers without harming employment prospects. But how should countries set their minimum wage rate? The processes that countries use to set their minimum wage rate and structure differ greatly, as do the methods for adjusting it. The different approaches have merits and shortcomings.
Key findings
Pros
Of the numerous methods to set minimum wages, many countries now rely on an expert body to advise governments on the appropriate rate.
The “bite” of the minimum wage—the ratio of the minimum to the median wage—varies substantially across countries.
Minimum wages that vary for different groups of workers (such as by age and sector) can target low wages and poverty better than a simpler rate structure can.
The upside of government involvement in rate setting is that they can potentially take bolder steps than an evidenced based expert body but do risk politicizing the minimum wage.
Cons
Using a formula to set the minimum wage leaves little flexibility to respond to changing labor market conditions but can ensure low wage workers do not get left behind.
When the minimum wage is set by the government rather than by a formula or with the advice of a third party, there is a risk of setting it on political rather than economic grounds.
Minimum wage rates that vary for different groups of workers can be too complex to administer and may lead to non-compliance because of ignorance about the correct rate.
Comparable evidence on the effectiveness of different approaches is almost impossible to obtain, as many influences other than the minimum wage are at play.
