Assessing Minimum Wage Policy Implications upon Income Inequalities. The Case of Romania

Abstract

Starting from the consideration that excessive income inequalities could hamper sustainable growth, our paper aims to evaluate the impact of the minimum wage policy upon wage and income distributions. Using the European Union Survey on Income and Living Conditions (EU-SILC) database with national representative sample of households, an income distribution analysis was conducted for the case of Romania based on two microsimulation approaches. The first one assumed building a counterfactual income distribution under the hypothesis of no change in minimum wage, while the second one implied a decomposition of the Gini coefficient of income inequalities based on main income determinants, including the minimum wage level and the share of minimum wage earners in the total number of employees. Both approaches pointed to similar findings, indicating a positive effect of the minimum wage on wage inequalities reduction for both genders, although higher for women, as they are more present among lower paid employees. The minimum wage policy can reshape the wage distribution, by enlarging the share of minimum income earners and narrowing the middle. Moreover, the household disposable income becomes less unequal when minimum wage increases, meaning that the income gain spreads over the entire household as most minimum wage earners come from poor households with numerous children.