Study examines impact of minimum wage on labour market

In November 2003, the Bank of Estonia published a study on the impact of the statutory minimum wage on the national labour market. The study finds that minimum wage increases lead to a fall in employment among the workers who are directly affected by the rise, and increase the share of workers whose wages are below the statutory minimum.

The nominal level of the statutory minimum wage in Estonia has been steadily increasing since the beginning of the 1990s - see the table below. In the first half of the 1990s, the increase in the minimum wage was slower than the average wage increase, which led to a fall in the ratio of the minimum wage to the average wage. However, since 1996, the minimum wage has been increasing faster than the average wage. Despite this rapid increase, the ratio of the minimum wage to the average wage in Estonia in 2002, at 30%, was the lowest among the countries acceding to the EU.

Minimum wage developments, 1995-2003
Year 1995 1996 1997 1998 1999 2000 2001 2002 2003
Date of minimum wage increase 9/1994 1/1996 2/1997 1/1998 1/1999 1/2000 1/2001 1/2002 1/2003
New monthly minimum wage level (EEK) 450 680 845 1,100 1,250 1,400 1,600 1,850 2,160
Increase in nominal minimum wage (%) 50.0 51.1 24.3 30.2 13.6 12.0 14.3 15.6 16.8
Increase in real minimum wage (%) 16.3 22.8 11.7 20.3 10.0 7.7 8.0 12.3 13.4
Average gross monthly wage (EEK) 1,734 2,985 3,573 4,125 4,418 4,907 5,510 5,781 na
Minimum wage as % of average wage 26.0 22.8 23.6 26.7 28.3 28.5 29.0 30.0 na

Source: Statistical Office of Estonia; Hinnosaar and Rõõm (2003)

It is expected that the minimum wage will increase significantly over the next few years, owing to a general agreement signed in August 2001 between the Confederation of Estonian Trade Unions (Eesti Ametiühingute Keskliit, EAKL) and Estonian Employer’s Confederation (Eesti Tööandjate Keskliit, ETTK), according to which the minimum wage should represent 41% of the average wage by 2008 (EE0311101N).

In November 2003, the Bank of Estonia (Eesti Pank) published a study, in which two economists at the Bank (Marit Hinnosaar and Tairi Rõõm) examine the effects of the minimum wage on employment and wages in Estonia over 1995-2000. In estimating the effects, they use micro-data from national labour force surveys. In their analysis they divide the sample into several wage groups and investigate the impact of minimum wage increases on 'work probability' at different points in the wage distribution. Approximately 8% of the workers in the sample used in the study earn wages that are below the minimum wage level although, according to Estonian regulations, the minimum wage is compulsory for all workers without exceptions. This proportion is higher in the sectors where the average wage level is lower, such as agriculture, hotels and restaurants and personal services,

The main findings of the study are: first, that a minimum wage increase leads to a reduction in employment among the group of workers who are directly affected by this change, ie those whose wages have to be raised as a result; and second, that, as the real value of the minimum wage rose, the proportion of workers with earnings below the legal minimum level increased as well.

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