Simulating Aggregate and Distributional Effects of Minimum Wage Increases in Romania

Industry Overview - Minimum wages are a critical component of social protection systems, aiming to protect vulnerable workers and reduce poverty and wage inequality, but poor design can lead to risks such as reduced job opportunities for low-skilled and young workers [2] - Romania has experienced significant real growth in minimum wages over the past decade, with the minimum-to-median wage ratio increasing from 38% in 2007 to 60% in 2017, placing it among the top EU countries in this metric [15] - The minimum wage in Romania is higher than the living wage needed to cover a basic food basket but insufficient to include non-food components, which could lead to long-term job losses, especially for younger workers [2] Labor Market Dynamics - The minimum wage increase in Romania has varying impacts across regions and sectors, with the accommodation and food services sector and the Suceava region being the most affected due to the high proportion of minimum wage earners [2] - Male employees are more affected by minimum wage increases than female employees, and younger workers face higher risks of job loss [2] - The share of minimum wage earners in Romania is consistently high, ranging from 24% to 28% between 2020 and 2021, with 2% of employees earning below the minimum wage threshold [84] Sectoral Impact - The construction sector has the highest proportion of minimum wage earners at 54.6%, followed by accommodation and food services at over 50%, while sectors like electricity, gas, and steam have less than 2% of employees earning minimum wages [91][92] - Microenterprises have the highest proportion of minimum wage earners at 67%, while large enterprises have only 6% of employees earning minimum wages, reflecting the trend that average wages increase with firm size [93][94] Policy Implications - Linking the minimum wage to inflation could result in moderate employment losses, particularly in the long term, with younger workers experiencing the most significant adverse effects [109] - Aligning the minimum wage with a living wage estimate could lead to substantial short-term wage increases but may also cause notable job losses, especially among low-wage and younger workers [118] - The minimum wage increase has a more substantial positive impact on income inequality when aligned with a living wage estimate, with the Gini index decreasing from 0.356 to 0.344 and the bottom 50% income share increasing by 0.7 percentage points [123] Demographic and Regional Variations - The youngest and oldest age groups are most affected by minimum wage increases, with 43% of workers born in 2001 earning minimum wages compared to 27% of those born in 1994 [95] - Regional disparities are significant, with Suceava county having the highest proportion of minimum wage earners at 38%, nearly double that of Sibiu county at 21% [96]