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Minimal Salary

Company: Deloitte

Mentioning the issue of a minimal salary is like lighting a fuse – and not only among economists. A simple textbook labour market model says that a minimal salary may lead to involuntary unemployment if it is set too high. Nevertheless, in reality, the labour supply and demand curves are not straight lines. Empirical studies about the effects of a minimal salary on unemployment do not yield clear results. In a situation where a certain sector is dominated by a single employer (a local monopsony), the negotiating terms between the employer and job applicants are unequal and a minimal salary is a response to the situation.

As in many other cases, it applies that the minimal salary may be useful if set reasonably, but harmful if exaggerated. What is the reasonable amount of a minimal salary? A joint report prepared by the ILO, OECD, IMF and the World Bank focusing on the CEE countries concludes that it is between 30-40% of the salary median, which corresponds to 25-35% of the average salary.
What is the situation like in the Czech Republic? Following a series of increases in the past three years, the ratio of the minimal salary and the average salary should be at 37.5%. As the government has approved another increase in the minimal salary for the next year, the ratio will move further up to 39.5%. In European terms, the figure is somewhat below the average. Nevertheless, the problem need not be that the minimal salary is too low in the Czech Republic but that it is too high in a host of other countries. As the above mentioned research paper says, we have already passed the reasonable limit and further increases in the minimal salary may do more harm than good. than good.

Author: David Marek, Chief Economits, Deloitte

Tags: Finance | Human Resources |

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