The Organization for Economic Co-operation and Development (OECD) emphasizes the significance of this issue. When considering inflation, it becomes essential to examine how price increases interact with changes in the minimum wage, noting that the observed effects tend to vary across countries but often show limited negative consequences alongside potential positive outcomes.
“As inflation reaches levels not seen in most OECD economies over the past four decades and affects the lowest-income and most vulnerable households most, the minimum wage could play a key role in maintaining living standards for low-wage workers while helping to stabilize public finances and inflation,” the OECD stated in a recent report published this week.
In this context, the OECD highlights a growing consensus among policymakers and academics that, at current levels in many OECD nations, minimum wage increases—even substantial ones—can improve earnings for lower-income groups with little to no adverse effect on employment.
One-sided power of companies
Likewise, the OECD notes that arguments for raising minimum wages in settings where they are too low or for introducing them where they do not exist are gaining momentum in light of mounting evidence of monopsony in labor markets. Monopsony describes a situation in which firms hold disproportionate wage-setting power and may suppress wages and employment below what a competitive market would determine.
On the other hand, the OECD observes that a line of academic research cited by its think tank suggests the impact of minimum wage increases on broad wage growth may be modest, leading to the conclusion that higher minimum wages do not automatically translate into large inflationary pressures.
Turning to labor markets such as the United Kingdom, where around 5 percent of workers earn the minimum wage—a share comparable to Spain per OECD data—a 20 percent uplift in the minimum wage would likely translate into a small, measured rise in inflation, estimated at roughly 0.2 percent.
In any case, the OECD recommends a careful assessment of social and economic impacts when considering minimum wage changes. It advises engaging social partners and other stakeholders in dialogue about potential consequences before proceeding with adjustments to the wage floor.