Political parties intend to raise legal minimum wages, but is it the most sensible approach?

Trouw, NPO
Erasmus School of Economics

In an article from Trouw and in the talkshow Goedemorgen Nederland from the NPO, Professor of Public Economics at Erasmus School of Economics Bas Jacobs elaborates on his stance that there are better instruments available to increase purchasing power of low-income employees.

During the last few weeks, many political parties have presented their election programmes for the upcoming elections of the Dutch parliament in March 2021. From left-wing parties to right-wing parties, there seems to be consensus on the topic of minimum wages: they need to increase. Political party SP announced it will put a resolution to vote to immediately increase minimum wages by ten percent. The underlying thought seems to be to alleviate financial pressure on low-income households. But is this the right path to this noble intent?

One thing seems to be crystal clear among economists: rising minimum wages will have its toll on employment. Since employees will be more expensive to employ, other production means will become relatively cheaper. Another important factor is the fact that the Dutch social benefit system is linked to the minimum wage: if the minimum wage increases, so will benefits. According to the CPB Netherlands Bureau for Economic Policy Analysis, an increase of the minimum wages by five percent is assessed to lead to a loss of 18,000 jobs. The linkage between benefits and minimum wages leads some parties such as the VVD to believe that the incentive to work will weaken. However, estimates indicate that these changes will be minimal, especially in the long run: since an increase of benefits increases disposable income as well, this will function as a consumption-boosting mechanism.

Alternatives

According to Jacobs, it is more sensible to alleviate the tax burden on low-income households or pay back some of the collected tax money. His research indicates that low-income employees are in this manner able to spend more money whilst keeping employment costs of companies constant. This is beneficial to the employees, since their odds of losing their jobs don’t increase with the aforementioned increase of minimum wages. Alleviating the tax burden or returning some of the tax revenue comes with a price: the decreased revenue will need to be compensated: this can be achieved by raising the capital gains tax, income tax or revenue tax. This downside is not only inherent to these measures: if we raise the minimum wages, the costs of this raise will be diverted to other parties such as consumers, shareholders or better paid employees within an organisation.

More information

You can watch Jacobs' appearance at Goedemorgen Nederland here; you can read the article from Trouw, 12 November 2020, here.