I have heard various politicians say that wages can only be increased by law. I was unpleasantly struck by the complete misunderstanding of the mechanism of the free market, so I decided to write this article to explain how the salary should be formed and why it is risky to use other pseudo-economic mechanisms.

The average wage in the economy is formed as a result of the interaction of demand and supply, which largely depends on labor productivity in the relevant industry. When we are talking about mostly skilled or highly skilled labor, minimum wage legislation has no effect because the market rewards workers according to the efficiency and productivity of their work. Thus, the average wage is formed at a level not limited by the conditions of the minimum wage, theoretically at a much higher level.

Unlike the average wage, the minimum wage is set by law and its role is to provide a minimum payment for work that is usually unskilled, low-skilled, or performed by young people with no experience, at the beginning of a particular career, or with low pay. educational level. The minimum wage is also provided to those who work temporarily or part-time. Thus, the minimum wage is addressed to the most vulnerable categories of workers.

When the minimum wage increases every year and significantly, it is no longer related to the efficiency and value of the work performed – let’s not forget that we are talking about especially unskilled labor, whose productivity or added value cannot increase by its very nature. to. For each uncorrelated increase in the minimum wage with productivity, firms using such unskilled labor prefer to retain fewer workers, because obviously firms’ resources do not increase as much as the minimum wage increases to afford the same number of workers and the productivity of workers is not higher either.

Employers will lay off some employees, and the workload and effort of the employee who will not be laid off will be greater. In other words, the earnings-to-labor ratio does not improve even for those who keep their jobs, in addition to the social costs of those who lose their jobs due to increased pressure on companies with increasingly higher wage costs.

On the other hand, middle-income workers, regardless of education and experience, see their wages increasingly closer to the minimum wage paid for unskilled work. As a result of the proximity or equality of purchasing power of unskilled and skilled workers, the claim of the latter for higher remuneration automatically arises, which makes a difference between the level of complexity and efficiency of skilled labor and repetitive, simple work. at no extra cost.

Inevitably, there is a negative psychological impact on skilled workers who see between their salary and the minimum a huge gap in skills rather than rewards. Two things follow from this: on the one hand, pressure on wage costs for all companies (both companies that employ unskilled labor, the pressure exerted by the minimum wage law, and companies that use middle-class labor or high-skilled, the pressure exerted by workers who feel they are underpaid compared to unskilled workers) leading to higher prices and ultimately inflation, and on the other hand, this pressure can lead to undesirable consequences such as informal payments to provide a wage package more attractive to skilled workers. or black is employed in the field of unskilled labor.

The conclusion is simple! Any increase in the minimum wage without correlation to worker productivity creates structural problems in the labor market, demotivates people with skills, and leads to layoffs among less skilled workers.

N. Red: Tenase Stamule is an associate professor at the Faculty of Business Administration (teaching foreign languages) at the Academy of Economic Studies. He teaches the courses “Business Management” and “Intercultural Management” in German. Dean of the Faculty of Business Administration, ASE.