A recent article in The Baltic Times inspired today’s post on minimum wages and the cost of living. According to the article, Europe’s Baltic states (Estonia, Latvia, and Lithuania) have some of the lowest minimum wage rates in the European Union. Latvia, in particular, has the third lowest rate (287.07 euros/month). The lowest rates are found in Romania (157.26 euros/month) and Bulgaria (158.5 euros). In contrast, tiny Luxembourg sets a standard of 1,874.19 euros/month. In U.S. dollars, the Luxembourg rate equals 2,510.29 U.S. a month (a nice sum of money). The Romanian standard is equal to 210.63 U.S. (a not as nice sum of money).
Naturally, I started thinking about cost of living between these countries and dug a little bit deeper and found a few surprises. I pulled data on cost of living (as of 2012) from numbeo.com, not familiar with this site but it offers a variety of indexes (rent, groceries, restaurant, purchasing power parity) in addition to an aggregated consumer price index. Each place or state is measured against New York City (set at 100%) so if Japan has a rent index of 105% then, on average, rents in Japan are 5% higher than in New York City. Minimum wage statistics (as of 2013) are from Eurostat, a part of the European Commission. Some results are shown in the table below:
The first interesting surprise is that not all European states have a country-wide standard for minimum wage. With Europe and its associated states, Norway, Switzerland, Denmark, Iceland, Sweden, Finland, Austria, Italy, Cyprus, Germany, Montenegro, and Macedonia don’t have standard minimum wages. Readers may be shocked to hear that the liberal Nordic states (Norway, Sweden, Denmark, Finland, Iceland) don’t have a national standard (I know I was). What makes it even more surprising is that the indices in these countries are high as well. Norway had the highest consumer price index in Europe (based on available 2012 data, which leaves out Luxembourg), 151.34%. Thus, consumer prices in Norway are over 50% higher than in New York City. Rent, while cheaper than New York City, is the second highest, 55.5%. The highest, Switzerland (also without a national standard), is 58.51%.
Some additional digging on Sweden revealed the likely reason that these states don’t have a set minimum wage – its established at local levels (hello devolution!). A Swedish news source noted in December 2012 that the setting of Sweden’s minimum wage has become “more decentralized,” while an academic paper from 2008 reveals that contractual wage increases and minimum wages are are collectively agreed to for a period of 2 to 3 years. Further, the news article points out that the ratio of average minimum wage to median income (or the hypothetical income of the worker in the middle of the lowest paid and highest paid worker) is the second highest in the Organization for Economic Cooperation and Development (essentially a rich states’ club that includes most of Western Europe, the United States, and Japan). Considering Germany’s federal structure, minimum wages are likely set at local levels there as well. Finally, I would assume that the rest of the Nordic states share a similar model to Sweden’s.
The other surprise is where countries fall in terms of balancing minimum wage with price indices. The outliers are interesting, France offers a minimum wage of over 1,400 euros/month with a combined consumer price and rent index of 75%. The United Kingdom, on the other hand, offers 200 euros/month less than France, despite a higher combined index of 77%. And then there’s the other end of the scale, Poland offers 376 euros as a minimum wage with a combined index of 38%. Bulgaria, noted above as having the second lowest minimum wage (159 euros), has a combined index of 37%. Romania, the lowest with 157 euros, has a combined index of 35%.
As for the Baltic states, Latvia’s 287 euros is balanced on a combined rent and consumer price index of 48% of New York City. By contrast, Croatia and Estonia offer 374 euros and 320 euros for similar combined indices. Lithuania’s 289 euros is not only higher than Latvia’s but its combined index is lower, 45%.
This information allows us to hypothesize why this phenomena exist and what the likely geographic impact will have. Most obviously, France’s higher minimum wage rate is likely a reflection of its more state-driven liberalism. On the other hand, the United Kingdom an early advocate of laissez faire economics has the lowest minimum wage standard of the countries with the highest indices. To a certain extent I would assume most countries and their constituent provinces would set competing standards of minimum wages. For instance, the United States maintains a federal minimum wage but many states (such as Washington) and municipalities (such as San Francisco) set minimum wages, higher than the countrywide average. Setting different minimum wages based on geography (specifically economic geography) makes sense, the cost of living varies from place to place. However, there can be unintended consequences.
Previously I posted on explosive rural to urban growth, minimum wage laws may play a small role into this growth as well – at least where minimum wages are set (primarily in the most economically developed countries). Since the “less” skilled and “less” educated workers (I use ironic quotes because it all depends on what you define as less) are likely to be the ones most like to need a guaranteed minimum wage, higher rates are likely to attract internal migrants to that area. Incidentally, this idea stumbles upon the push-pull model of migration (certain factors “push” migrants away, say lack of jobs or opportunities, while others “pull”, perhaps higher guaranteed wages). Assuming that a guaranteed minimum wage factors into the decision to relocate and that the potential migrant is willing and able to relocate and a host of other factors, perhaps he or she will. Like the attraction of the informal economy, a potential migrant may reason that she is more likely to earn a better wage (even if its the minimum) in a city or state with higher wage than staying at home.
While I have yet to come across direct evidence of this: namely, that workers relocate based on minimum wage laws. I do have some coincidental anecdotes. Take for instance another news report from the Baltic Times, aside from a wealth of geographic information, it discusses Latvian migration to Ireland. As I said earlier, Latvia has a minimum wage of 287 euros/month for a combined rent/price index of 48%. Ireland has a minimum wage of 1,461 euros/month for a combined rent/price index of 82%. In other words, the minimum wage of Ireland is 5 times higher than Latvia while the average prices are less than twice as high. The article is worth quoting at length:
‘Latvia has overcome the crisis only in terms of macroeconomic indicators; most residents are not seeing any improvements and are learning languages and trying to leave the country,’ Latvian President Andris Berzins said in an interview on Latvian Radio on Feb. 18. During his recent visit to Ireland, Berzins saw no point in urging local Latvians to return home. Ireland’s gross domestic product per capita is approximately three times higher than in Latvia, and Ireland’s social support system is much better as well. ‘The figures needed to bring them home are beyond our reach,’ explained the president.
Though I’m not suggesting that the uneven geography of minimum wages needs to be leveled, since Ireland could not (and should not) lower its minimum wage given its higher cost of living and Latvia certainly can’t raise its minimum wage (too much) given its small, but growing economy, more thought needs to be given to the potential impact that local policies in one constituency will have on other localities in a completely different state, often in another country. In the case discussed today, local minimum wage laws in Ireland (perhaps even at lower levels in Sweden or Germany) may influence migration patterns in other economies, notably Latvia or other Baltic or eastern European states. Developing a complex model of migration, based on much more than simple “push”/”pull” frameworks (but certainly including it), would leave to more effective management of people’s expectations, more reasonable growth, and, potentially, less strain on urban and state resources.
Note: If you’re wondering why the U.S. cost of living is so low compared with most of Europe, keep in mind that everything is being compared to New York City. The rest of the U.S. (mercifully) is not like that city.