Publication: Simulating Aggregate and Distributional Effects of Minimum Wage Increases in Romania: Evidence from Survey and Administrative Tax Data
Loading...
Date
2024-09-30
ISSN
Published
2024-09-30
Editor(s)
Abstract
Minimum wages are an essential component of a country's social protection system, aiming to protect vulnerable workers and reduce poverty and wage inequality. Yet, there are risks associated with poor minimum wage design. Higher minimum wages may result in higher earnings for affected workers but fewer job opportunities for others, including the demographic groups they are intended to help, such as those with very low wages and skills and youth, so ex-ante evaluation of potential employment, wage, and distributional impacts is needed. Over the past decade, Romania experienced significant real growth in the minimum wage and a rising minimum-to-median wage ratio. However, when looking at minimum living standards, the analysis shows that the statutory minimum wage is higher than the living wage needed to cover a consumption food basket estimated by the European Commission under the European Reference budget network, but not enough to include non-food components. The microsimulation results using administrative tax data show that tying minimum wage to inflation or the living wage could lead to a slight short-term wage increase for some workers but may cause job loss in the long run, especially for younger workers. The minimum wage increase could have varying impacts across regions and sectors, with the accommodation and food services sector and those living in the Suceava region, which has the highest proportion of affected employees. Moreover, male employees tend to be more affected than their female counterparts.
Link to Data Set
Citation
“Robayo-Abril, Monica; Zamfir, Mădălina; Wroński, Marcin. 2024. Simulating Aggregate and Distributional Effects of Minimum Wage Increases in Romania: Evidence from Survey and Administrative Tax Data. Policy Research Working Paper; 10934. © World Bank. http://hdl.handle.net/10986/42217 License: CC BY 3.0 IGO.”
Associated URLs
Associated content
Other publications in this report series
Publication Geopolitics and the World Trading System(Washington, DC: World Bank, 2024-12-23)Until the beginning of this century, the GATT/WTO system worked. Economic research provided a compelling explanation. It showed that if governments maximize the well-being of their own countries broadly defined, GATT/WTO principles would facilitate mutually beneficial cooperation over their trade policy choices. Now heightened geopolitical rivalry seems to have undermined the WTO. A simple transposition of the previous rationalization suggests that geopolitics and trade cooperation are not compatible. The paper shows that this is only true if rivalry eclipses any consideration of own-country well-being. In all other circumstances, there are gains from trade cooperation even with geopolitics. Furthermore, the WTO’s relevance is in question only if it adheres too rigidly to its existing rules and norms. Through measured adaptation to the geopolitical imperative, the WTO can continue to thrive as a forum for multilateral trade cooperation in the age of geopolitics.Publication Tradeoffs over Rate Cycles(Washington, DC: World Bank, 2025-05-23)Central banks often face tradeoffs in how their monetary policy decisions impact economic activity (including employment), inflation and the price level. This paper assesses how these tradeoffs have evolved over time and varied across countries, with a focus on understanding the post-pandemic adjustment. To make these comparisons, we compile a cross-country, historical database of “rate cycles” (i.e., easing and tightening phases for monetary policy) for 24 advanced economies from 1970 through 2024. This allows us to quantify the characteristics of interest rate adjustments and corresponding macroeconomic outcomes and tradeoffs. We also calculate Sacrifice Ratios (output losses per inflation reduction) and document a historically low “sacrifice” during the post-pandemic tightening. This popular measure, however, ignores adjustments in the price level—which increased by more after the pandemic than over the past four decades. A series of regressions and simulations suggest monetary policy (and particularly the timing and aggressiveness of rate hikes) play a meaningful role in explaining these tradeoffs and how adjustments occur during tightening phases. Central bank credibility is the one measure we assess that corresponds to only positive outcomes and no difficult tradeoffs.Publication Global Socio-economic Resilience to Natural Disasters(Washington, DC: World Bank, 2025-05-22)Most disaster risk assessments use damages to physical assets as their central metric, often neglecting distributional impacts and the coping and recovery capacity of affected people. To address this shortcoming, the concepts of well-being losses and socio-economic resilience—the ability to experience asset losses without a decline in well-being—have been proposed. This paper uses microsimulations to produce a global estimate of well-being losses from, and socio-economic resilience to, natural disasters, covering 132 countries. On average, each $1 in disaster-related asset losses results in well-being losses equivalent to a $2 uniform national drop in consumption, with significant variation within and across countries. The poorest income quintile within each country incurs only 9% of national asset losses but accounts for 33% of well-being losses. Compared to high-income countries, low-income countries experience 67% greater well-being losses per dollar of asset losses and require 56% more time to recover. Socio-economic resilience is uncorrelated with exposure or vulnerability to natural hazards. However, a 10 percent increase in GDP per capita is associated with a 0.9 percentage point gain in resilience, but this benefit arises indirectly—such as through higher rate of formal employment, better financial inclusion, and broader social protection coverage—rather than from higher income itself. This paper assess ten policy options and finds that socio-economic and financial interventions (such as insurance and social protection) can effectively complement asset-focused measures (e.g., construction standards) and that interventions targeting low-income populations usually have higher returns in terms of avoided well-being losses per dollar invested.Publication From Chalkboards to Chatbots(Washington, DC: World Bank, 2025-05-20)This study evaluates the impact of a program leveraging large language models for virtual tutoring in secondary education in Nigeria. Using a randomized controlled trial, the program deployed Microsoft Copilot (powered by GPT-4) to support first-year senior secondary students in English language learning over six weeks. The intervention demonstrated a significant improvement of 0.31 standard deviation on an assessment that included English topics aligned with the Nigerian curriculum, knowledge of artificial intelligence and digital skills. The effect on English, the main outcome of interest, was of 0.23 standard deviations. Cost-effectiveness analysis revealed substantial learning gains, equating to 1.5 to 2 years of ’business-as-usual’ schooling, situating the intervention among some of the most cost-effective programs to improve learning outcomes. An analysis of heterogeneous effects shows that while the program benefits students across the baseline ability distribution, the largest effects are for female students, and those with higher initial academic performance. The findings highlight that artificial intelligence-powered tutoring, when designed and used properly, can have transformative impacts in the education sector in low-resource settings.Publication Disentangling the Key Economic Channels through Which Infrastructure Affects Jobs(Washington, DC: World Bank, 2025-04-03)This paper takes stock of the literature on infrastructure and jobs published since the early 2000s, using a conceptual framework to identify the key channels through which different types of infrastructure impact jobs. Where relevant, it highlights the different approaches and findings in the cases of energy, digital, and transport infrastructure. Overall, the literature review provides strong evidence of infrastructure’s positive impact on employment, particularly for women. In the case of electricity, this impact arises from freeing time that would otherwise be spent on household tasks. Similarly, digital infrastructure, particularly mobile phone coverage, has demonstrated positive labor market effects, often driven by private sector investments rather than large public expenditures, which are typically required for other large-scale infrastructure projects. The evidence on structural transformation is also positive, with some notable exceptions, such as studies that find no significant impact on structural transformation in rural India in the cases of electricity and roads. Even with better market connections, remote areas may continue to lack economic opportunities, due to the absence of agglomeration economies and complementary inputs such as human capital. Accordingly, reducing transport costs alone may not be sufficient to drive economic transformation in rural areas. The spatial dimension of transformation is particularly relevant for transport, both internationally—by enhancing trade integration—and within countries, where economic development tends to drive firms and jobs toward urban centers, benefitting from economies scale and network effects. Turning to organizational transformation, evidence on skill bias in developing countries is more mixed than in developed countries and may vary considerably by context. Further research, especially on the possible reasons explaining the differences between developed and developing economies, is needed.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Tax Compliance in Romania(Washington, DC: World Bank, 2024-10-07)This paper uses statistical matching techniques to assess tax compliance and underreporting of labor income in Romania, overall and for different population groups, including among minimum wage workers, to understand the distributional implications and its links with minimum wage policy and design. Understanding the extent and distribution of tax evasion is relevant for enhancing domestic tax capacity, its redistributive impacts, and the links with social policy, including minimum wage policy. Estimating the average underreporting of income is challenging due to the significant underrepresentation of top incomes in survey data. After censoring, the average underreporting of income is 6 percent. When looking at the distribution of tax evasion, the analysis also shows significant underreporting of income in the bottom half of the income distribution. The results show that tax-reported income at the median of the income distribution equals only 90 percent of the true (survey) income, and at the 25th percentile, this share is 83 percent. Women are more tax compliant than men. Tax compliance varies across sectors of the economy, regions of the country, and demographic groups. Transport, construction, and food and accommodation are the sectors of the economy with the lowest tax compliance. The underreporting of income results in lower fiscal capacity for the country and may also lower the efficiency of means-tested social assistance. The underreporting of income significantly increases the share of minimum wage earners, which may impact the minimum wage policy.Publication Ex-ante Evaluation of the Impact of Increases in Minimum Wages on Labor Market Outcomes in Kosovo(World Bank, Washington, DC, 2020-08)This paper uses microsimulation techniques to quantify the potential ex-ante impacts of several minimum wage increases on labor market outcomes in Kosovo. The results show that the overall impacts of a minimum wage increase in the baseline scenario are likely to be modest, although the impacts for some groups may be stronger. In the most extreme scenario, an increase to 250 euros per month, the simulated unemployment rate increases by 0.4 percentage point in the short term and about 0.6 percentage point in the long term. The youth unemployment rate (ages 15-24) is anticipated to increase by up to 1.1 percentage points in this scenario, a relatively large increase considering the already high levels of unemployment among this group. Similarly, unemployment among the unskilled (with primary school or less) is simulated to increase by 0.6 percentage point in the short term and up to 0.8 percentage point in the long term. The paper finds that, even if raising the minimum wage is long overdue, due to decreasing nominal wages in real terms, policy needs to strike a fine balance between protecting workers and ensuring that employment effects are not too large.Publication Statistically Matching Income and Consumption Data(Washington, DC: World Bank, 2024-09-23)To design effective policy instruments that target the energy poor in Romania, it is crucial to understand who the energy poor are. However, these types of analyses are limited by the current data environment. While monetary energy poverty estimates rely on data from expenditure surveys, traditional welfare indicators and detailed information on access to social protection programs form part of the EU-SILC. Samples of both surveys differ; consequently, record linkage of both surveys is impossible. This paper propose an alternative solution to combine information from both surveys, namely statistical matching techniques. It applies several imputation models to impute information on energy spending shares from the HBS into the EU-SILC based on a set of matching variables, compare the performance of these models and apply the best-performing one. Based on the resulting matched dataset, the results show that nearly all the monetary poor are also energy poor, but that a significant additional share of the population in Romania is energy poor. Energy poverty rates are higher at the lower end of the welfare distribution. This result has significant welfare implications.Publication Simulating Welfare Impacts of Changes in the Monthly Social Allowance Scheme and Heating Allowances in Bulgaria(Washington, DC: World Bank, 2024-06-26)Bulgaria still ranks among the EU countries with the highest levels of poverty and inequality. Before 2023, Bulgaria's Social Assistance / Monthly Social Allowance scheme had limited coverage, strict eligibility criteria, and limited impact on poverty reduction. Additionally, it was not adjusted or linked to inflation. The Bulgarian government introduced a reform in 2022 aimed to increase the scope and access of individuals to social support by increasing the basis for determining the differentiated minimum income threshold (now 30 percent of the relative poverty line) and the parameters linked with age, health condition, and social status, affecting the social programs anchored to it, such as the Monthly Social Allowance and the heating allowance. This paper assesses this reform's potential ex-ante poverty and distributional impacts, relying on a comprehensive tax/benefit system assessment called the Commitment to Equity and microsimulation techniques. The changes in the legal basis for determining access to social assistance introduced with the reform are expected to create some relief from the indexation of the benefits over time. They will now be tied to the evolution of the relative poverty line and, therefore, linked to the evolution of median income. The results of the policy simulations show that the combined effect of the changes in the Monthly Social Allowance and the heating allowance contributes to a slight reduction in the poverty gap but not enough to move a sizable share of people out of poverty, as shown by the negligible impact on the at-risk-of-poverty rate. Inequality is barely affected. Compared with a Bulgarian food basket, the results show that eligibility thresholds are still restrictive. These results suggest further scope for improvement in the design of these programs, including anchoring them to an absolute poverty line or basic consumption basket.Publication Conceptualizing and Measuring Energy Poverty in Bulgaria(Washington, DC: World Bank, 2024-06-28)Addressing energy poverty has emerged as one of the main challenges for Bulgaria's poverty and social inclusion policy, particularly in the context of the European Green Deal and the current crisis in Ukraine. To tackle the adverse impacts of energy poverty effectively, a crucial initial step involves accurately defining and measuring this issue. Identifying households affected by energy poverty is essential for shaping and implementing targeted policies. This study explores various definitions of energy poverty within the Bulgarian context by (1) systematically reviewing current methodologies and measures employed in the EU context; (2) assessing the feasibility of implementing these measures in Bulgaria based on data availability, comparing the incidence of energy poverty using alternative measures, and presenting characteristics of energy poverty to inform potential policy instruments; and (3) providing policy recommendations for the measurement and monitoring of energy poverty. The way energy poverty is measured and the overlap with income poverty shape the types of policy solutions perceived to be possible and appropriate to address it. The evaluation supports the need to shift from single indicators to multidimensional approaches in measuring energy poverty. Additionally, enhancing the granularity, quality, and frequency of expenditure and income surveys can contribute to easier operationalization of these concepts and a better understanding of the demographics of energy poverty. The study proposes exploring alternative data generation methods, such as smart meters, further to enhance insights into the dynamics of energy poverty.
Users also downloaded
Showing related downloaded files
Publication Choosing Our Future(Washington, DC: World Bank, 2024-09-04)Education can propel faster and better climate action in two crucial ways. First, education can galvanize behavior change at scale - not just for tomorrow, but also for today. Second, education can unlock skills and innovation to shift economies onto greener trajectories for growth. At the same time, education needs to be protected from climate change. Extreme climate events and temperatures are already eroding hard-won progress on schooling and learning. Climate change is causing school closures, learning losses, and dropouts. These will turn into long-run inter-generational earnings losses putting into jeopardy education’s powerful potential for spurring poverty alleviation and economic growth. Governments can act now to adapt schools for climate change in cost-effective ways. This report outlines new data, evidence, and examples on how countries can harness education to propel climate action. It provides an actionable policy agenda to meet development, education, and climate goals together, recognizing that tackling climate change requires changes to individual beliefs, behaviors, and skills – changes that education is uniquely positioned to catalyze.Publication Unlocking the Power of Healthy Longevity(Washington, DC: World Bank, 2024-09-12)Noncommunicable diseases (NCDs) are among the major health and development challenges of our time. Every year, about 41 million people die due to NCDs. This makes up about 74 percent of all deaths globally, the majority of which are in low- and middle-income countries (LMICs). Countless more people live with NCDs every day. Yet, NCDs are largely treatable and preventable. The risk of developing NCDs and deaths from them can both be lowered with appropriate attention to prevention and treatment. However, weak health systems and limited access to affordable care and information, especially in LMICs, contribute to lapses in seeking and receiving appropriate and timely care. This compendium is a compilation of 18 chapters, each exploring a different but related topic in the nexus of NCDs, human capital, and productivity. It is based on a series of analytical work taken up by the World Bank to support the Healthy Longevity Initiative (HLI) - a collaborative effort between the World Bank, the University of Toronto, and key academic and development partners including the Harvard University and the University of Washington. The HLI presents one of a growing set of efforts to increase the urgency of policy response to NCDs across the world.Publication Finance and Prosperity 2024(Washington, DC: World Bank, 2024-08-29)While financial sector risks in the larger and higher per capita countries are moderate, half of lower-income countries face significant risks over the next 12 months. Nearly 70 percent of countries facing high financial sector risks are currently not adequately prepared to handle financial stress. The report also identifies a particular risk facing financial sectors in several countries: a large and growing exposure to sovereign debt. This exposure surged to its highest level in the past decade. Finally, the report looks at how countries can enable more climate finance through the banking sector without compromising on the important goals of financial sector stability and inclusion for underserved people.Publication World Development Report 2004(World Bank, 2003)Too often, services fail poor people in access, in quality, and in affordability. But the fact that there are striking examples where basic services such as water, sanitation, health, education, and electricity do work for poor people means that governments and citizens can do a better job of providing them. Learning from success and understanding the sources of failure, this year’s World Development Report, argues that services can be improved by putting poor people at the center of service provision. How? By enabling the poor to monitor and discipline service providers, by amplifying their voice in policymaking, and by strengthening the incentives for providers to serve the poor. Freedom from illness and freedom from illiteracy are two of the most important ways poor people can escape from poverty. To achieve these goals, economic growth and financial resources are of course necessary, but they are not enough. The World Development Report provides a practical framework for making the services that contribute to human development work for poor people. With this framework, citizens, governments, and donors can take action and accelerate progress toward the common objective of poverty reduction, as specified in the Millennium Development Goals.Publication Democratic Republic of Congo Urbanization Review(Washington, DC: World Bank, 2018)The Democratic Republic of Congo has the third largest urban population in sub-Saharan Africa (estimated at 43% in 2016) after South Africa and Nigeria. It is expected to grow at a rate of 4.1% per year, which corresponds to an additional 1 million residents moving to cities every year. If this trend continues, the urban population could double in just 15 years. Thus, with a population of 12 million and a growth rate of 5.1% per year, Kinshasa is poised to become the most populous city in Africa by 2030. Such strong urban growth comes with two main challenges – the need to make cities livable and inclusive by meeting the high demand for social services, infrastructure, education, health, and other basic services; and the need to make cities more productive by addressing the lack of concentrated economic activity. The Urbanization Review of the Democratic Republic of Congo argues that the country is urbanizing at different rates and identifies five regions (East, South, Central, West and Congo Basin) that present specific challenges and opportunities. The Urbanization Review proposes policy options based on three sets of instruments, known as the three 'I's – Institutions, Infrastructures and Interventions – to help each region respond to its specific needs while reaping the benefits of economic agglomeration The Democratic Republic of the Congo is at a crossroads. The recent decline in commodity prices could constitute an opportunity for the country to diversify its economy and invest in the manufacturing sector. Now is an opportune time for Congolese decision-makers to invest in cities that can lead the country's structural transformation and facilitate greater integration with African and global markets. Such action would position the country well on the path to emergence.