A European directive is being created, in which politicians are advocating a minimum wage that is equal to a certain percentage of the average wage in each member state. Aart Gerritsen, Assistant Professor at Erasmus School of Economics, conducted research on minimum wages and shares his insights on these plans in an interview with NPO Radio 1 (31 May 2022).
Instruments
Gerritsen first stresses that a minimum wage is one of the two instruments to redistribute wealth. Another way to redistribute wealth is via fiscal instruments, i.e., taxes, subsidies and surcharges. He stresses that raising the minimum wage is not free, and has to be paid either by consumers due to higher commodity prices, by businesses due to lower profits, or a combination of both. Moreover, raising the minimum wage may lead to an incentive for businesses to hire less low-skilled and/or low-paid individuals.
Fiscal policies
The second instrument – the fiscal instrument – is a more effective tool according to Gerritsen. Since this instrument does not give businesses any incentive to hire less low-skilled and/or low-paid individuals. Indeed, a high number of fiscal policies do not affect hiring decisions for businesses.
Size of the raise
A shift in recent literature has occurred however, the assistant professor admits. Recent literature shows that the employment effects of raising the minimum wage seem to be limited. He gives one important side note; this holds for marginal changes in minimum wage. Thus, the employment effect of large changes of minimum wages are still ambiguous.
Concludingly, the assistant professor is sceptical about raising the minimum wage via the European Union. He assesses that redistribution policies are political choices; a European implementation therefore clashes with the principle of subsidiarity. Moreover, a more cost-effective alternative is also readily available: the fiscal instrument.
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For the whole interview by NPO Radio 1, 31 May 2022, click here.