Simulating Aggregate and Distributional Effects of Minimum Wage Increases in Romania : Evidence from Survey and Administrative Tax Data

Minimum wages are an essential component of a country's social protection system, aiming to protect vulnerable workers and reduce poverty and wage inequality. Yet, there are risks associated with poor minimum wage design. Higher minimum wages may result in higher earnings for affected workers but fewer job opportunities for others, including the demographic groups they are intended to help, such as those with very low wages and skills and youth, so ex-ante evaluation of potential employment, wage, and distributional impacts is needed. Over the past decade, Romania experienced significant real growth in the minimum wage and a rising minimum-to-median wage ratio. However, when looking at minimum living standards, the analysis shows that the statutory minimum wage is higher than the living wage needed to cover a consumption food basket estimated by the European Commission under the European Reference budget network, but not enough to include non-food components. The microsimulation results using administrative tax data show that tying minimum wage to inflation or the living wage could lead to a slight short-term wage increase for some workers but may cause job loss in the long run, especially for younger workers. The minimum wage increase could have varying impacts across regions and sectors, with the accommodation and food services sector and those living in the Suceava region, which has the highest proportion of affected employees. Moreover, male employees tend to be more affected than their female counterparts.