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What would be the consequences of an increase in the minimum wage proposed by Nupes?

What would be the consequences of a rise in the minimum wage? Since 2021, in a context of improvement in the labor market and the end of the health crisis, the resumption of inflationary tensions and the erosion of purchasing power, the idea of ​​an increase in the minimum growth wage (smic ) is experiencing a strong comeback in the public debate. A true marker of left-wing parties, a constant and historic claim by labor unions, the project appears in the first chapter of the “shared program of government” published by the New Popular Economic and Social Union (Nupes), which came second in the first round of the legislative elections ( 25.66%), on June 12, just behind the presidential majority (25.75%).

The Nupes plans to raise the minimum wage to 1,500 euros net per month, an increase of more than 15%. The same idea also figured in the programs of all the left-wing presidential candidates.

The prospect of a sharp rise in the minimum wage would contradict the French strategy of wage moderation, implemented for more than fifteen years, which results in the absence of a “boost” given to the minimum wage. The only exception to this rule was the discretionary increase of 0.6% on July 1, 2012, decided following the election of François Hollande as President of the Republic. Since the creation of the group of experts on the minimum wage in 2009, all successive governments have followed the recommendations of its annual reports to the letter, advising to refrain from any boost in order to favor competitiveness and employment.

The debate resonates with a draft European directive aimed at harmonizing minimum wages in Europe, where 22 countries among the 27 have a minimum wage, from 332 euros gross in Bulgaria to 2,257 euros in Luxembourg, according to 2022 data. published by Eurostat.

Harmonization will not necessarily go in the direction of an increase in countries such as France where the minimum wage is initially high, but the prospect of greater European coordination in terms of wages raises in renewed terms the question management of the minimum wage. In this new context, what are the arguments for raising the minimum wage and what would be the effects?

The bad excuse of inflation

The preservation of purchasing power in an environment of a return to inflation, now close to 5% on an annual basis, does not constitute a satisfactory argument for pleading for an additional increase in the minimum wage in France. Indeed, the minimum wage is already increasing mechanically with prices, so as to keep its purchasing power at least constant. The revaluations are framed in a precise way by the law n°70-7 of January 2, 1970 “reforming the guaranteed minimum wage and creating a minimum growth wage”.

Since its creation in 1950, in the context of tension on the prices of raw materials following the Korean War, the guaranteed interprofessional minimum wage (smig) already guaranteed strict indexation to inflation. The same goes for the minimum wage, indexed automatically for more than fifty years on the consumer price index (excluding tobacco since 1992).

Article 31 xc of the 1970 law provides that:

“When this index reaches a level corresponding to an increase of at least 2 p. 100 compared to the index observed when establishing the immediately preceding minimum growth wage, the minimum growth wage is raised in the same proportion from the first day of the month following the publication of the index leading to this increase “.

This is why the minimum wage automatically increased by 2.45% on May 1, 2022, or around 34 euros net per month, after two other increases in seven months. The monthly gross minimum wage now reaches 1,645.58 euros on the basis of 35 hours of work per week (ie 1,302.64 in euros net and 10.85 euros gross per hour worked).

A weapon against wage inequality

The best argument of the proponents of a rise in the minimum wage undoubtedly lies in the fight against wage inequalities. Admittedly, wage disparities contribute only a small part to overall income inequality, but they nonetheless constitute a component on which the State can act through adjustments to the minimum wage.

By making the lowest wage levels illegal, the minimum wage plays a powerful role in compressing wage hierarchies. It truncates wage distributions on their left, which reduces the volume of employment but also mechanically reduces wage disparities. This double effect of the minimum wage, negative on employment but positive on inequalities, has been known in the economic literature since the seminal study published by George Stigler in 1946 in theAmerican Economic Review.

In France, it is clear that the clauses increasing the minimum wage alone do not make it possible to fight against wage inequalities. The minimum wage is only half-indexed to average hourly wages, with the worker and employee basic hourly wage rate (SHBOE) as the benchmark.

For fifteen years, if we put aside the post-election increase of 2012, the repeated absence of a “boost” given to the minimum wage therefore seems to break with the spirit of the 1970 law. According to data from Insee, the purchasing power of employees paid the minimum wage has indeed diverged from that of workers and employees, whose benchmark index is the basic hourly wage (SHBOE). Since the 2006 boost, the cumulative difference has reached a total of 3.6% despite the 2012 revaluation.

What effects on employment?

In Stigler’s model, the reduction in wage inequality after an increase in the minimum wage is offset by a fall in the volume of employment. This prediction has been one of the most studied by economists: a search for “minimum wage” yields 2.5 million entries on Google Scholar. However, it is extremely difficult to confirm this relationship empirically since the specificity of a minimum wage scheme is that it applies extremely broadly.

In the case of France, in the law of February 12, 1950, the “i” of the “smig” meant “interprofessional” and it already applied to all branches. In the law of 1970 which introduced the “minimum wage for growth”, the inter-professional character was not called into question. This great generality of application denies evaluators access to a satisfactory counter-factual which would allow them to evaluate the impact of a rise in the minimum wage by comparing a treated group and a control group, which considerably limits the scope of their assessments and calls for caution.

One of the most cited studies in economics, with more than 3000 citations, is that of David Card and Alan Krueger (1993 then updated in 2015) which analyzes the effects of an increase in the minimum wage in New Jersey in comparing fast-food employment in that state and in Pennsylvania. This research was also mentioned by the jury of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, co-awarded to David Card in 2021. It concludes that there are no effects on employment. an increase in the minimum wage.

In France, the empirical evidence mainly concerns the effects of the cost of unskilled labor on employment. Numerous studies have assessed the impact of the social security contribution exemption schemes rolled out successively since the beginning of the 1990s. in exemptions carried out in 2019, more than 50 billion euros.

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History of contribution relief. CAE (2019)

The summary of this work carried out by the Economic Analysis Council (CAE) confirms that employment is very sensitive to the cost of labor when its increases take place close to the minimum wage. A sharp increase in the minimum wage would therefore contribute to increasing unemployment. This is also the reason why increases in the minimum wage have been offset by exemptions in the past. But this strategy now finds these limits with the abolition of all exemptions, now acquired at the level of the minimum wage.

Today, however, labor shortages in certain sectors of activity and the prospect of a return to full employment are changing the situation. These developments seem likely to alter the priorities given to employment and competitiveness, which have led to a continuous expansion of social exemptions on low and medium wages. In this new context, the effects of increases in the minimum wage on employment deserve to be better documented.

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By Yannick L’HortyEconomist, university professor, Gustave Eiffel University.

The original version of this article was published on The Conversation.