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ILO expert explains the benefits and the challenges of introducing a national minimum wage

The introduction of a national minimum wage can benefit low paid workers in an economy, but also the labor market in general and the society, and increase aggregate demand, Econometrician and Wage Specialist at the International Labour Organisation (ILO) Rosalia Vazquez-Alvarez has told the Cyprus News Agency. However, she explained that the national minimum wage should be set at an adequate level so that the economy does not suffer job losses or experience a negative effect on the level of prices.

The Government has asked the ILO and the European Commission to assist Cyprus on this matter. The relevant studies are expected to be completed by November and the Government’s main position is that a national minimum wage should be introduced once the economy has achieved full employment, that is when unemployment falls below 5%.

“Setting a minimum wage has a direct effect of benefiting low paid workers who are often wage employees working under vulnerable positions”, Vazquez-Alvarez told the Cyprus News Agency. “This means that the first and most direct benefit of a minimum wage is to increase the labor income (and therefore household earnings) of poorer households in society”.

She noted that indirectly, there are many benefits for the labor market and for the society: a minimum wage can be a positive incentive for those at the bottom of the wage distribution and such incentives can have a positive effect for labor productivity. Furthermore, it can also act as a reference point in the wage determination process between workers and employers and can help solve disputes that would otherwise result in interruptions in the workplace. In addition, she explained, increasing the labor earnings of lower income households reduces overall inequality in society, and less inequality is a fundamental factor for social stability and social cohesion. Moreover, there is a positive effect via aggregate demand. “Increasing aggregate demand induces to economic growth – this can be via increase consumption, but also increase production and investment (if producers see more demand) and also, increase public spending because greater aggregate demand can lead to higher revenue in the form of indirect taxes”, she explained.

The ILO expert said that the criteria that should be considered in determining the height of the minimum wage are the needs of workers and their families (cost of living, direct and indirect taxation) but also the economic context (labor productivity, production costs, the structure of the economy – for example size of enterprises, the distribution of economic units in economic sectors, etc.)

“Basically, we have to think that the implementation of a minimum wage has to be the correct one that helps workers and their families achieve a decent standard of living, but at the same time it is set at the adequate level so that the economy does not suffer in terms of lost employment or an adverse effect on the price level, for example”, Vazquez-Alvarez warned.

She noted that empirical evidence should be the basis for a debate between social partners and the government in order to arrive at a consensus on the level, to start with, on the monitoring of the effect of such a level over time and on the mechanism that should be implemented so that the legal floor is adjusted regularly and over time to accommodate changes in the economy and changes in the needs of workers.

“The use of sound empirical evidence (descriptive analysis on the wage distribution and impact assessment exercises) should avoid setting a too high minimum wage that can be detrimental to economic outcome or too low minimum wage that could be in effect the same as not setting a minimum wage at all”, she explained.

According to her, in the case of Cyprus, “there is no specific difference to the rules mentioned above in order to decide on the level of the minimum wage: empirical studies should be put forwards to assess the right level, and these empirical studies should be the basis for setting a minimum wage. The fact that Cyprus is a member of the EU means that the country can draw from other EU countries experience in setting and monitoring a minimum wage”.

Asked about the ILO’s role in the effort of the Cyprus Government to introduce a national minimum wage, Vazquez-Alvarez told the Cyprus News Agency said that the Organisation is providing technical assistance to the government in order to come up with the right set of comprehensive statistical analysis in order to serve both the government and social partners in making coordinated and consensual choices on the level at which a minimum wage could be set. “Therefore, the ILO role is that of guiding on the needs of data and empirical methodology to evaluate the needs of workers and their families as well as the economic context”, she added.

As she said, in the evaluation of a minimum wage it is recommended to look at the value of the minimum wage in relation to the median value in the wage distribution in a country. In many countries the minimum wage – relative to the median – ranges from 50% to 60%.

(Cyprus News Agency)

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