The Impact of Minimum Wages on Consumption in EU Countries
NATÁLIA VÁROŠOVÁ, LENKA VISKOTOVÁ, DAVID HAMPEL
Faculty of Business and Economics, Department of Statistics and Operation Analysis,
Mendel University in Brno,
Zemědělská 1, 613 00 Brno,
CZECH REPUBLIC
Abstract: - In this paper, we investigate the significance of the relationship between minimum wages and
consumption in EU countries between 1999 and 2021 using panel regression and cluster analysis. We can show
a statistically significant effect of the minimum wage on consumption, in a negative direction. For Eastern
European countries, the short-term effect of minimum wage growth on consumption is positive, but in the long
term, the overall effect is negative. The results of the paper are supported by the outputs of other authors on the
effects of minimum wages on employment and consumer prices.
Key-Words: - consumption, EU countries, low-wage workers, minimum wage, panel data model, personal
income.
Received: October 8, 2023. Revised: May 2, 2024. Accepted: May 25, 2024. Published: June 27, 2024.
1 Introduction
Consumption theory has evolved over time and
different authors used various approaches to
understand consumption expenditure better.
Classical economic theory suggests that
consumption is determined mainly by changes in
interest rates. A decrease in interest rates reduces
the incentive for households to save and thereby
increases consumption expenditure, [1].
Work [2], argues that income is irrelevant
because the consumer can borrow or lend money,
and therefore current consumption depends on
lifetime income and not on current income. In
contrast, Keynes presents three pertinent points.
Firstly, the level of consumption spending primarily
relies on absolute income; secondly, consumption
expenditure is directly dependent on the absolute
amount of present income; and thirdly, an increased
income in a given period will lead to greater
consumption during that same period, [3].
Research [4], however, proposed another theory,
whereby the current amount of consumption is not
solely determined by the current levels of absolute
and relative income; it is also influenced by
previous patterns of consumption. In [5], authors
attempted to solve the paradox of consumption. This
research builds on [2] and adds that people want to
have steady consumption over their lifetime.
Therefore, people do not react to predictable
changes in income but only to unpredictable ones.
To sum up, everything that has been stated so far,
most theories agree that income is a key factor for
consumer spending.
Certainly, income is formed by wages mainly in
the case of low-wage employees. These are affected
by the minimum wage setting, so it is possible to
consider a link between the minimum wage and
income for at least certain groups of employees.
However, the effect of an increase in the minimum
wage on total income is not straightforward. Work
[6], employs data from the United Kingdom and
uses difference-in-difference estimation to show that
the magnitude of the minimum wage hike has a
major impact on whether the actual wage growth of
low-wage workers will increase significantly. It is
argued that these results are in accordance with the
fact that employers comply with the statutory
minimum wage but withhold or offset the wage
growth that they could have provided in periods of
relatively low minimum wage uprating. The authors
of [7], found evidence that low-wage workers in the
USA are strongly affected by an increase in the
minimum wage. The wages that workers initially
earn close to the minimum wage rise, but their hours
and employment decline. This combination results
in a lower total income after the increase in the
minimum wage. In [8], the authors present the
results of a similar investigation in Brazil, where for
a short lag in a minimum wage increase there are
modest positive effects on the incomes of low-
income families. However, the estimated effects of a
longer lag in the increase of the minimum wage had
a negative effect on total income. Overall, the
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1511
Volume 21, 2024
authors found no evidence that the minimum wage
in Brazil produces positive distributional outcomes
for low-income households. The paper [9], focused
on low-income families in the USA and observed
that immediately following a minimum wage
increase, both household income and spending rose
for households with minimum wage workers. The
authors also point to the fact that elevated
expenditure levels are funded by rises in
collateralized debt.
The authors of [10], gathered evidence from the
United Kingdom suggesting that there is a not very
substantial change in the spending patterns of
households after an increase in the minimum wage.
The explanation could be that the changes in the
minimum wage were so small that they were not
reflected in consumption. On the contrary, in [11],
the authors dealt with income effect and
consumption response. Their study concentrated on
China and found that a relationship between
consumption expenditure and the minimum wage
does exist. Their research considered the fact that
the amount of the minimum wage also depends on
the number of people earning the minimum wage in
the household. Their work provided evidence for a
positive response in consumption after a change in
the minimum wage. This beneficial impact was
supported by substantial spending on healthcare and
schooling for household members. A full income
effect cannot be attributed solely to the increase in
wages because their increase was frequently
accompanied by other social advantages. The
positive side is that the data provided no evidence of
any significant adverse employment effects. This
observation may be explained by the low minimum
wage level compared to the median wage. The
authors claim that the effect of the minimum wage
will also depend on the type of households
prevailing in the country. Poor childless households
tend to save more than households with children.
Households with at least one child are the primary
drivers of the substantial marginal propensity to
consume. Note that an increase in income may not
simply mean an increase in consumption, but also
changes in the consumption basket, e.g., a shift
towards organic food consumption, [12].
Another study for Canada, [13], shows that a one
percentage point increase in the actual minimum
wage causes a 0.5 percentage point increase in the
real retail trade. Their investigations showed that a
rise in the minimum wage boosts consumption and
hence economic growth. More recent research was
performed in India, [14]. This study confirmed an
increase in consumption after an increase in the
minimum wage with no evidence of a corresponding
negative effect on employment. However, the
results of their study are tempered by India’s non-
compliance with minimum wage levels. Many
developing countries, including India, have
significant differences in their de jure and de facto
regulations. The positive impact of minimum wage
increases on wages and consumption is reduced in
regions with low compliance rates. According to
[15], the minimum wage in both low-wage and
high-wage provinces in Canada has a positive
impact on household consumption in the long term
more than in the short term.
Interesting research was conducted by the
authors of [16], who examined the impact of local
minimum wage increases on price dynamics at local
grocery stores in the USA between 2001 and 2012.
They found that minimum wage increases have a
significant influence on grocery store prices. Their
results suggest that the costs of minimum wage
increases are borne by consumers rather than
companies. The authors also conclude that price
effects diminish the effectiveness of the minimum
wage as an instrument to reduce poverty. At the
macroeconomic level, it is possible to observe, for
example, a significant impact of the minimum wage
on exports, [17], which should again have a positive
effect on the living conditions of the population.
Research [18], examined the response of
consumption to changes in the minimum wage
within the USA. Like in [16], he used retail sales
data as a reasonable measure of nondurable
consumption. In [18], the author uses a panel data
framework in his paper and considers employment,
population, gross state product, and house prices as
additional regressors. As for the minimum wage as
an anti-poverty tool, this work came to a different
conclusion than, [16]. According to [18], the
minimum wage is an e-ective policy that modestly
supports aggregate demand and helps fight poverty.
It is suggested that redistribution in favor of low-
wage workers may lead to a consequent increase in
aggregate consumption. Wage differentials between
countries compounded by differences in minimum
wages, unemployment rates, and the quality of the
education system, among other factors, determine
emigration motivated by the desire for higher
consumption, including phenomena such as ‘brain
drain’, [19].
The authors of [20], use comparative statics to
analyze the long-term outcomes resulting from the
imposition of a binding minimum wage. They
compare equilibrium values in a perfectly
competitive economy and a minimum wage
economy. In doing so, it has been necessary to make
a distinction between the government-imposed
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1512
Volume 21, 2024
minimum wage per unit of labor time as an
exogenous variable and the market-determined
wage rate per effective unit of work as an
endogenous variable. For these two situations, the
authors introduce multi-equation models that
naturally include consumption. When a government-
imposed minimum wage is applied, the authors
show the direct effect of the minimum wage on
consumption under certain settings of the
parameters of the economy.
The minimum wage varies across the European
Union. Some countries have had a minimum wage
for years, whereas some have yet to establish a
minimum wage. This means that the minimum wage
in the European Union ranges from zero to
thousands of Euros. The percentage of people
earning a minimum wage also varies. Therefore,
households in some countries may be more insistent
on a minimum wage than in others. The continuing
importance of the nominal minimum wage is
reflected in the ongoing debates among politicians.
The Directive on Adequate Minimum Wages in the
European Union has just entered into force, [21]. In
assessing the adequacy of statutory minimum
wages, Member States are required to follow
indicative reference values such as 60% of the gross
median wage and 50% of the gross average wage.
The minimum wage may be seen as the
cornerstone upon which the majority of sustainable
development objectives are built, [15]. Minimum
wages can be set in countries in two ways. They are
either government-legislated or the product of
collective bargaining agreements. The proponents of
minimum wage argue that the minimum wage raises
the prosperity of all workers, lowers income
inequality, [22], and improves the overall
performance of the economy, [23].
A change in the minimum wage alone, even a
relatively large one, may not lead to a change in
other economic quantities, because the level of the
minimum wage may be unimportant relative to the
overall level of wages. One way to show the
importance of a set minimum wage is the so-called
Kaitz index, the ratio of the minimum wage to the
median wage, published for example by the
International Labour Office, [24]. The closer the
Kaitz index is to one, the more strongly the level of
the minimum wage affects actors in each sector,
[25]. Based on the link between income and
consumption, it may be assumed that an increase in
the Kaitz index will be accompanied by an increase
in consumption.
The influence of the minimum wage on
employment has been studied many times.
According to [26], data suggest only a muted effect
of the minimum wage on employment, while it
significantly increases the earnings of low-paid
workers. The authors of [7], appeal to policymakers
to consider a trade-off in the increase in
unemployment with an increase in the minimum
wage. Higher unemployment is naturally perceived
as a negative effect in society, while an increase in
consumption expenditure is usually viewed as a
positive effect and can be used at least as a positive
externality of an increase in the minimum wage.
It is also worth mentioning that higher minimum
wages imply higher costs for employers and can be
reflected in higher prices. This may also influence
the pattern of consumer demand. The paper [11],
highlighted four reasons why an increase in
minimum wages may not lead to higher
consumption levels. Initially, a higher minimum
wage could only replace other social benefits, thus
reducing the actual increase in income boost
substantially. Many social benefit systems are based
on income limits, which makes it practically
difficult to assess the cumulative impact of
ineligibility. In addition, the short-term nature of the
increase in disposable income from higher minimum
wages could be perceived, particularly in
developing countries with elevated inflation rates.
This could lead to only a slight improvement in
welfare due to efforts to stabilize consumption.
Furthermore, a rise in the minimum wage might
heighten the risk of unemployment, prompting
households to save more cautiously, thereby
diminishing the impact on consumption. Lastly, the
increased occurrence of unemployment could leave
certain households considerably poorer than under
the former political framework. Overall, it can be
argued that the value of consumption expenditure
cannot be understood as a product of unemployment
and income alone. The simultaneous effect of the
minimum wage on both of these components affects
consumption expenditure and it is therefore
important to examine the direct impact of the
minimum wage on consumption.
There are not many studies examining the direct
effect of the minimum wage on consumption at the
national level. The theoretical impact of a minimum
wage increase on consumption is not unambiguous
and it is therefore meaningful to examine the current
situation in real economies. The aim of this study is
to assess the significance and direction of the impact
of the minimum wage on consumption in European
Union (EU) countries between 1999 and 2021.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1513
Volume 21, 2024
2 Material and Methods
Based on the findings of the literature review,
consumption expenditure (Y) is dependent on lagged
consumption expenditure, the national minimum
wage (X1), and a lagged national minimum wage,
GDP (X2), and possibly a dummy variable (D) that
reflects the presence (D = 0) or absence (D = 1) of a
minimum wage, 𝜖𝑡 represents random error:
𝑌
𝑡= β1𝑌
𝑡−1 + β2𝑋1,𝑡 + β3𝑋1,𝑡−1 + β4𝑋2,𝑡 + β5𝐷𝑡+ 𝜖𝑡.
The models assume that minimum wage growth
directly affects the growth of the dependent
variable. The statistical relevance of lagged
consumption expenditure and the lagged minimum
wage as explanatory variables is assumed due to the
slower adjustment of households to new income.
For GDP, both GDP and GDP per capita (GDPpc)
are used, and the same applies to consumption
expenditure. For countries without a minimum
wage, the variable X1 is set to 0 (case NMW0) or
takes the smallest value of the minimum wage in the
reference year (case NMWlowest). An overview of the
estimated models with different compositions of
variables is given in Table 1.
Table 1. Summary of the estimated models
X1
D
(M1), (M5), (M9)
𝑁𝑀𝑊0
absent
(M2), (M6), (M10)
𝑁𝑀𝑊0
present
(M3), (M7), (M11)
NMWlowest
absent
(M4), (M8), (M12)
NMWlowest
present
Note: In models (M1)–(M8) total consumption expenditure is
used, in models (M9)–(M12) consumption expenditure per
capita is considered. In models (M1)–(M4), total GDP is
considered, in models (M5)–(M12), GDP per capita is used.
The whole dataset was taken from Eurostat. The
data provided on the Eurostat website for the
minimum wage begins with the year 1999;
therefore, the time series from 1999 to 2021 is used.
During the period under review, not all countries
had established a minimum wage. For this research,
two approaches were used. In the first case, for
countries with no established minimum wage or set
one in the period under review, zeros were added in
place of blind spots. In the second case, the lowest
minimum wage that appeared in a given year among
all the countries studied was used in place of blind
spots. To assess whether or not a country introduced
a minimum wage, a dummy variable was added.
The dummy variable indicates the absence of a
minimum wage for the selected country in the
selected year.
National minimum wage data from Eurostat were
captured bi-annually. For this article, semi-annual
data were converted into annual data using an
average. Final consumption expenditure (CE) and
gross domestic product were collected yearly in
millions of Euros at current prices. To obtain per
capita variables, the aggregated annual values were
divided by the population of each country in the
given year.
As living standards still vary across EU
countries, a cluster analysis based on consumption
expenditure per capita and GDP per capita was used
to create groups of comparable countries. The
cluster analysis was performed for the years 1999,
2010, and 2021. The use of standardized Euclidean
metrics and Ward’s distance proved to be the most
appropriate. Regression analysis of panel data (for
all the countries as well as for detected clusters) was
used to estimate the possible dependency of
consumption on the minimum wage. The
significance test of the variables in this model is
performed using t-tests. When modeling
macroeconomic data, regression results may suffer
from the so-called spurious regression effect, which
is particularly difficult to rule out in the case of
panel data. For this reason, the Im-Pesaran-Shin test
was used to assess the stationarity of residuals for
all the estimated models. Models with fixed effects
and random effects were estimated and the final
model was selected by the Hausman test. The
significance level was set to 0.05, and all
calculations were performed in MATLAB R2023b
and Gretl 2023c software.
3 Results
As an introductory step, a cluster analysis was
performed to create relatively compact groups of
countries concerning the consumption and income
levels of the countries. Based on dendrograms from
the cluster analysis (for the results from 2010, see
Figure 1), it is possible to observe the different
behavior of Luxembourg, as this country has
considerably higher GDP per capita and
consumption expenditure per capita than the other
countries. Therefore, this country was excluded
from the further analyses.
A regression analysis of panel data was
performed for all the EU countries (excluding
Luxembourg), so total consumption is modeled for
26 countries, with a time series range of 23 (years
1999–2021). The Hausman test indicated the
appropriateness of the fixed effects models in all
cases, and the Im-Pesaran-Shin test ruled out any
spurious regression. The estimated models had a
very high coefficient of determination, significant
GDP or GDP per capita, and lagged consumption in
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1514
Volume 21, 2024
the expected direction. The indicator D was not
significant in any of the models. At least one
variable expressing the minimum wage was always
significant, but there was no uniform direction of
the effect on consumption. A negative effect was
detected in models (M1), (M3), (M9), and (M11),
and a positive effect in models (M5) and (M7).
Therefore, the results of the cluster analysis were
used in further analyses, and a regression analysis
was performed for the EU countries separately for
each cluster. Classification of the EU countries into
clusters is shown in Table 2. Figure 2 presents the
time series of per capita consumption, GDP per
capita, and national minimum wage of the selected
country for each cluster. Specifically, these are
France (Cluster 1), Spain (Cluster 2), and Poland
(Cluster 3).
The characteristics of the individual clusters are
shown in Table 3. Luxembourg, which forms a
separate cluster, is characterized by significantly
higher GDPpc, CEpc, and NMW than the other
countries and is therefore rightly excluded from
further analyses. Cluster 1 has almost twice the
GDPpc of Cluster 2, and CEpc is about half as high.
The minimum wage is also twice that of Cluster 2. It
should be noted here that only 4 out of 10 countries
in Cluster 1 have established a minimum wage, but
the countries lacking a minimum wage have well-
developed union and collective bargaining systems.
Cluster 3 has both GDPpc and CEpc roughly half the
values of Cluster 2, but the NMW here is almost
three times smaller.
Panel models (M1)–(M12) were estimated
individually for each cluster. A common feature of
the models across the clusters is the rejection of
random-effects models using the Hausman test, and
the results for the fixed-effects models are presented
below. The only exceptions are the models with a
dummy variable (M2), (M4), (M6), (M8), (M10),
and (M12) in Cluster 2, which could not be
constructed due to collinearity. In this case, random
effects with Nerlove transformations were
employed. In all cases, the Im-Pesaran-Shin test
ruled out spurious regression. All the models are of
high quality with a coefficient of determination
above 0.94.
Table 2. Classification of the EU countries into
clusters
Cluster 1
Cluster 2
Cluster 3
Austria
Greece
Bulgaria
Belgium
Malta
Croatia
Cyprus
Portugal
Czech Republic
Denmark
Slovenia
Estonia
Finland
Spain
Hungary
France
Latvia
Germany
Lithuania
Ireland
Poland
Italy
Romania
Netherlands
Slovakia
Sweden
Source: Own determination
Fig. 1: Dendrogram of the cluster analysis of EU countries for 2010 concerning consumption expenditure per
capita and GDP per capita
Source: Own calculation
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1515
Volume 21, 2024
Table 3. Characteristics of determined clusters for the year 2010. Means of GDP, consumption, national
minimum wage, and counts of countries with set NMW
GDPpc
[EUR]
CEpc
[EUR]
GDP
[bil. EUR]
CE
[bil. EUR]
NMW
[EUR]
Countries with
NMW
Number of
countries
Cluster 1
34238
17359
769
408
1401
4
11
Cluster 2
18889
12067
304
188
696
5
5
Cluster 3
9766
5752
96
57
261
10
10
Luxembourg
84456
30255
42
15
1704
1
1
Source: Own calculation
Fig. 2: Time series of per capita consumption (CE per capita), GDP per capita, and national minimum wage
(NMW) of the selected countries
Source of data Eurostat, own processing
The results for Cluster 1 and the obtained
parameter signs showing the direction of possible
dependency and corresponding p-values are shown
in Table 4. Models (M2), (M4), and (M6) has an
insignificant dummy variable indicating the absence
of nominal minimum wage and therefore the
relevance of these models disappears compared to
the initial models (M1), (M3), and (M5). For models
(M5) and (M7), the estimates are distorted by the
statistical insignificance of GDP, which is
inconsistent with theoretical models of
consumption.
Models (M1), (M2), (M9), and (M11) report at
least one significant variable with minimum wage,
with a negative sign of the parameter. In model
(M8), neither variable expressing the minimum
wage is significant. The significant variable D
points to a systematically lower level of total
consumption in countries without a minimum wage.
However, this finding is not substantial, as the
countries without a minimum wage mainly include
large countries (Germany for the majority of years,
Italy). Models (M10) and (M12) have both
insignificant current and lagged minimum wages,
but once the lagged variable is removed, the current
minimum wage becomes statistically significant. In
the case of the model (M12), the same can be
claimed when removing the current minimum wage
and keeping the lagged one. Overall, for models in
which at least one variable expressing the minimum
wage is significant, the negative effect on
consumption dominates. Regarding Cluster 2, the
obtained signs of the parameters indicating the
direction of potential dependence and the associated
p-values are shown in Table 5.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1516
Volume 21, 2024
Table 4. Estimated models for Cluster 1 countries
Model
const
CElagged
NMW0
NMWlowest
NMW0, lagged
NMWlowest,
lagged
GDP
GDPpc
D
(M1)
<0.001
<0.001 (+)
0,018
(−)
×
0.039
(−)
×
<0.001 (+)
×
×
(M2)
<0.001
<0.001 (+)
0.019
(−)
×
0.099
(−)
×
<0.001 (+)
×
0.304
(−)
(M3)
<0.001
<0.001 (+)
×
0.013
(−)
×
0.055
(−)
<0.001 (+)
×
×
(M4)
<0.001
<0.001 (+)
×
0.052
(−)
×
0.070
(−)
<0.001 (+)
×
0.922
(−)
(M5)
<0.001
<0.001 (+)
0.022
(+)
×
0.372
(−)
×
×
0.124
(+)
×
(M6)
<0.001
<0.001 (+)
0.988
(−)
×
0.695
(−)
×
×
0.028
(+)
0.086
(−)
(M7)
<0.001
<0.001 (+)
×
0.027
(+)
×
0.425
(−)
×
0.340
(+)
×
(M8)
<0.001
<0.001 (+)
×
0.639
(−)
×
0.758
(−)
×
0.032
(+)
0.037
(−)
(M9)
<0.001
<0.001 (+)
0.151
(+)
×
0.045
(−)
×
×
<0.001 (+)
×
(M10)
<0.001
<0.001 (+)
0.149
(−)
×
0.228
(−)
×
×
<0.001 (+)
0.006
(−)
(M11)
<0.001
<0.001 (+)
×
0.114
(+)
×
0.046
(−)
×
<0.001 (+)
×
(M12)
<0.001
<0.001 (+)
×
0.288
(−)
×
0.151
(−)
×
<0.001 (+)
0.028
(−)
Notes: For each model, the sign of the parameters and the associated p-values are given. The term “lagged” in the subscript of the
variable name refers to the value of this variable in the previous year.
Source: Own calculation
In models (M1), (M3), (M4), and (M8) – (M12)
the minimum wage appears statistically
insignificant, and removing the current or lagged
minimum wage does not lead to the significance of
one of them. In the case of models (M2), (M5),
(M6), and (M7), removing one of the variables
representing the minimum wage results in a model
where the remaining variable – lagged minimum
wage in the case of models (M5), (M7) and current
minimum wage in the case of models (M2), (M6),
(M7) – is statistically significant with the negative
sign of the parameter.
In Cluster 3 (Table 6), the dummy variable turns
out to be insignificant in models (M2), (M4), (M6),
and (M8). Therefore, the relevance of these models
disappears in favour of the initial models without
the dummy variable. All the models without a
dummy variable, (M1), (M3), (M5), (M7), (M9),
and (M11), have both statistically significant
minimum wage variables. The parameter for the
current minimum wage always has a positive sign
and for the delayed minimum wage a negative sign.
The negative parameter for the lagged minimum
wage in absolute value is always larger than the
positive parameter for the non-lagged minimum
wage, so the overall effect of a minimum wage
increase on consumption is negative. This can be
interpreted that the income raised by the minimum
wage increase has a short-term effect on
consumption growth; however, in the long term, the
increase in the minimum wage causes consumption
to fall, presumably due to the loss of income of
workers laid off due to rising wage costs. The
current minimum wage, unlike the lagged one,
appears statistically insignificant in models (M10)
and (M12). Removing either the current or lagged
minimum wage results in a model in which the
remaining minimum wage is significant with a
negative sign of the parameter.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1517
Volume 21, 2024
Table 5. Estimated models for Cluster 2 countries
Model
const
CElagged
NMW0
NMWlowest
NMW0, lagged
NMWlowest,
lagged
GDP
GDPpc
D
(M1)
<0.001
0.024
(+)
0,335
(−)
×
0.478
(+)
×
<0.001 (+)
×
×
(M2)
0.015
0.019
(+)
0.230
(−)
×
0.396
(+)
×
<0.001 (+)
×
0.335
(−)
(M3)
<0.001
0.025
(+)
×
0.369
(−)
×
0.502
(+)
<0.001 (+)
×
×
(M4)
0.017
0.020
(+)
×
0.261
(−)
×
0.419
(+)
<0.001 (+)
×
0.392
(−)
(M5)
0.013
<0.001 (+)
0.612
(+)
×
0.261
(−)
×
×
0.006
(+)
×
(M6)
0.254
<0.001 (+)
0.725
(+)
×
0.288
(−)
×
×
0.004
(+)
0.304
(−)
(M7)
0.017
<0.001 (+)
×
0.701
(+)
×
0.265
(−)
×
0.003
(+)
×
(M8)
0.267
<0.001 (+)
×
0.817
(+)
×
0.291
(−)
×
0.002
(+)
0.304
(−)
(M9)
<0.001
<0.001 (+)
0.321
(+)
×
0.534
(−)
×
×
<0.001 (+)
×
(M10)
<0.001
<0.001 (+)
0.330
(+)
×
0.539
(−)
×
×
<0.001 (+)
0.105
(+)
(M11)
<0.001
<0.001 (+)
×
0.269
(+)
×
0.487
(−)
×
<0.001 (+)
×
(M12)
<0.001
<0.001 (+)
×
0.279
(+)
×
0.492
(−)
×
<0.001 (+)
0.106
(+)
Notes: For each model, the sign of the parameters and the associated p-values are given. The term “lagged” in the subscript of the
variable name refers to the value of this variable in the previous year.
Source: Own calculation
4 Discussion
The models for the given clusters of countries are
plausible and show a significant and unambiguous
effect of the minimum wage on consumption, except
for models (M5) to (M8). These models are specific
in that total consumption is explained by GDP per
capita. Evidently, the use of GDP per capita causes
problems in such models. For the group of EU
countries excluding Luxembourg, these models
show a positive effect of the minimum wage,
contrary to the other models, while for the Cluster 1
countries the GDP per capita variable is
insignificant. GDP per capita may undoubtedly be
considered an indicator of economic performance
affecting total consumption, but it is not appropriate
for modeling total consumption. For Cluster 2, due
to the insignificance of the minimum wage effect, a
subgroup of only countries with a minimum wage
was formed. This approach also did not provide
satisfactory results in the form of a usable model.
All the considered models were also assessed in
terms of the differences in the variables used. The
results obtained may be interpreted as analogous for
the models in levels due to the significance and
direction of the effect of the minimum wage, so we
do not present them in this paper. These results
support the statement that the reported models in
levels are not affected by spurious regression.
To better understand the effects of the minimum
wage on consumption, the Kaitz index was also
introduced in the models instead of the minimum
wage and the lagged minimum wage. In this case,
the data related to countries without an established
minimum wage were not relevant to the models and
were eliminated. The models were based on the
same findings with the use of consumption
expenditure as a dependent variable and lagged
consumption expenditure, gross domestic product,
and the Kaitz index as independent variables. The
use of a dummy variable was not relevant once
countries without an implemented minimum wage
were excluded.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1518
Volume 21, 2024
Table 6. Estimated models for Cluster 3 countries
Model
const
CElagged
NMW0
NMWlowest
NMW0, lagged
NMWlowest,
lagged
GDP
GDPpc
D
(M1)
<0.001
<0.001 (+)
0,049
(+)
×
0.032
(−)
×
<0.001 (+)
×
×
(M2)
<0.001
<0.001 (+)
0.129
(+)
×
0.041
(−)
×
<0.001 (+)
×
0.096
(−)
(M3)
<0.001
<0.001 (+)
×
0.026
(+)
×
0.016
(−)
<0.001 (+)
×
×
(M4)
<0.001
<0.001 (+)
×
0.052
(+)
×
0.017
(−)
<0.001 (+)
×
0.087
(−)
(M5)
0.113
<0.001 (+)
0.032
(+)
×
0.002
(−)
×
×
0.024
(+)
×
(M6)
0.122
<0.001 (+)
0.074
(+)
×
0.002
(−)
×
×
0.102
(+)
0.988
(−)
(M7)
0.134
<0.001 (+)
×
0.009
(+)
×
<0.001 (−)
×
0.029
(+)
×
(M8)
0.145
<0.001 (+)
×
0.021
(+)
×
<0.001
(−)
×
0.081
(+)
0.930
(−)
(M9)
<0.001
<0.001 (+)
0.008
(+)
×
0.002
(−)
×
×
<0.001 (+)
×
(M10)
<0.001
<0.001 (+)
0.430
(+)
×
0.002
(−)
×
×
<0.001 (+)
0.003
(−)
(M11)
<0.001
<0.001 (+)
×
0.004
(+)
×
<0.001
(−)
×
<0.001 (+)
×
(M12)
<0.001
<0.001 (+)
×
0.139
(+)
×
<0.001
(−)
×
<0.001 (+)
0.003
(−)
Notes: For each model, the sign of the parameters and the associated p-values are given. The term “lagged” in the subscript of the
variable name refers to the value of this variable in the previous year.
Source: Own calculation
In the resulting models, the Kaitz index was
never significant. This result may be explained by
the fact that the movements of average wages and
minimum wages are independent and the evolution
of the Kaitz index varies considerably across
countries. Given the harmonization imposed by the
Directive, [21], the Kaitz index may be expected to
perform better in the future, not only in
consumption models.
No corresponding studies are available for a
direct comparison of the results obtained. The
authors of [7], investigated how low-wage workers
can be affected by a minimum wage increase in the
USA. These workers initially earn more after the
minimum wage rises, but their employment
decreases, which leads to an overall lower total
income and consequently to lower total
consumption after the minimum wage increase. The
paper [8], obtained similar results for Brazil, where
the short-term response to the increase in the
minimum wage was an increase in family income,
but in the long term, there was a decline in total
family income and hence in consumption. These
results, although not from a European environment,
are consistent with our study, especially for Cluster
3 countries. There are also papers available on the
impact of the minimum wage on variables that
affect consumption indirectly. The studies [27],
[28], deal with OECD countries and find evidence
that collective bargaining, coordinated wage setting,
and minimum wages lower youth employment. The
authors of [29], used company-level variation
comparing low and high-wage companies and found
a modest disemployment effect of the minimum
wage setting in Germany. In [30], the authors
provide a comprehensive evaluation of a rapid
increase in the minimum wage in Hungary, which
went from 35% to 55% of the median wage of full-
time workers over a two-year period, using a variety
of methods. They found a small negative effect on
employment and a substantial increase in consumer
prices. This is in line with the research of [16],
whose authors found that a minimum wage increase
has a significant effect on the increase in grocery
store prices. These results support our findings in
the sense that the negative effect of a minimum
wage increase on consumption may be due to both
an increase in unemployment and consumer prices.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1519
Volume 21, 2024
5 Conclusion
In our work, we were able to demonstrate a
statistically significant relationship between the
level of the minimum wage and consumption. The
methodology of empirical verification of this
relationship is based on a theoretical model of
consumption, where the autoregression of
consumption and the inclusion of GDP as a proxy
for a country’s income level leaves little room for
truly significant variables with a relatively small
impact on consumption. This is also the reason why
our results may be considered plausible. To increase
robustness, we separately analyzed clusters of
countries with different economic levels. For the
cluster of countries mainly from Western and
Northern Europe and Italy, we obtained a purely
negative relationship, with an increase in the
minimum wage causing a decrease in consumption.
The cluster of Central and Eastern European
countries showed a positive response of
consumption to an increase in the minimum wage in
the short term, but a negative response in the long
term, and the overall effect of the minimum wage
increase was negative. It is possible to conclude that
in these countries there is room for the deployment
of the minimum wage as a consumption-enhancing
instrument (in the context of low-wage workers, a
tool to remove material deprivation), but the
positive effect must be supported by other
interventions to retain employment. The last cluster
analyzed was the Southern European countries,
where the effects of a minimum wage increase on
consumption were insignificant. This is probably
due both to the nature of the countries included here
(the small island states of Malta and Cyprus) and to
the significant interventions and regulations in the
settings of the economy, including minimum wages
(economic adjustment program in Portugal, reforms
in Greece accompanied by a significant fall in the
minimum wage). Another research direction on the
theme may be the use of microdata from
questionnaire surveys involving the consumption
and wages of respondents in relation to the
minimum wage setting of the respondent’s country.
References:
[1] Drakopoulos, S. A., Theories of Consumption,
in Louis-Philippe Rochon and Sergio Rossi
(eds.), An introduction to Macroeconomics,
2nd ed. Cheltenham, UK and Northampton,
MA, USA: Edward Elgar Publishing, pp.
233–267, 2021.
[2] Fisher, I., The Theory of Interest, New York:
The Macmillan Company, 1930.
[3] Jhingan, M.L., Macro-Economic Theory, 13th
ed. New Delhi, India: Vrinda Publications (P)
Ltd., 2022.
[4] Duesenberry, J. S., Income, Savings and the
Theory of Consumer Behaviour, Harvard
University Press: New York, 1949.
[5] Modigliani, F. & Brumberg, R. (1980), Utility
analysis and aggregate consumption
functions: An attempt at integration, in Abel,
R. Roger (ed.), The Collected Papers of
Franco Modigliani: The Life Cycle
Hypothesis of Saving, Vol.2, Cambridge, UK:
MIT Press, pp. 128–197, 1980.
[6] Swaffield, J. K., Minimum Wage Hikes and
the Wage Growth of Low-Wage Workers,
Bulletin of Economic Research, Vol.66, 2014,
pp. 384–405.
https://doi.org/10.1111/boer.12018.
[7] Neumark, D., Schweitzer, M. & Wascher, W.,
Minimum Wage Effects throughout the Wage
Distribution, The Journal of Human
Resources, Vol.39, No.2, 2004, pp. 425–450.
https://doi.org/10.2307/3559021.
[8] Neumark, D., Cunningham, W. & Siga, L.,
The Effects of the Minimum Wage in Brazil
on the Distribution of Family Incomes: 1996–
2001, Journal of Development Economics,
Vol.80, No.1, 2006, pp. 136–159.
https://doi.org/10.1016/j.jdeveco.2005.02.001.
[9] Aaronson, D., Sumit A. & French, E., The
Spending and Debt Response to Minimum
Wage Hikes, American Economic Review,
Vol.102, No.7, 2012, pp. 3111–39.
https://doi.org/10.1257/aer.102.7.3111.
[10] Aitken, A., Dolton, P. & Wadsworth, J., Did
the Minimum Wage Change Consumption,
Saving and Debt Behaviour? Report to the
Low Pay Commission, presented to UK
Parliament, 2014, [Online].
https://assets.publishing.service.gov.uk/gover
nment/uploads/system/uploads/attachment_da
ta/file/289423/AitkenDoltonWadsworth_Cons
umption_Saving_Debt_and_NMW_FINAL.p
df (Accessed Date: June 13, 2024).
[11] Dautović, E., Harald, H. & Huang, Y.,
Consumption Response to Minimum Wages:
Evidence from Chinese Households,
European Central Bank: Working Paper
Series 2333, 2019.
[12] Boboli, I., Thoma, L., & Mano, R., Who is
Paying More for Organic Food? - Evidence
from a Developing Country Considering
Socio-Demographic Characteristics of
Consumers, WSEAS Transactions on Business
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1520
Volume 21, 2024
and Economics, Vol.20, 2023, pp. 1167-1177.
https://doi.org/10.37394/23207.2023.20.104.
[13] Jung, Y. C., Adian, M. & Das A., The effect
of minimum wages on consumption in
Canada, The Economic and Labour Relations
Review, Vol.32, No.1, 2021, pp. 65–89.
https://doi.org/10.1177/1035304620949950.
[14] Mansoor, K. & O'Neill, D., Minimum wage
compliance and household welfare: An
analysis of over 1500 minimum wages in
India, World Development, Vol. 147, 2021,
pp. 105–653.
https://doi.org/10.1016/j.worlddev.2021.1056
53.
[15] Sabokkhiz, L., Lisaniler, F. G. & Nwaka, I.
D., Minimum Wage and Household
Consumption in Canada: Evidence from High
and Low Wage Provinces, Sustainability,
Vol.13, No.12, 6540, 2021.
https://doi.org/10.3390/su13126540.
[16] Renkin, T., Montialoux, C. & Siegenthaler,
M., The Pass-Through of Minimum Wages
into U.S. Retail Prices: Evidence from
Supermarket Scanner Data, The Review of
Economics and Statistics, Vol.104, No.5,
2022, pp. 890–908.
https://doi.org/10.1162/rest_a_00981.
[17] Saraireh, S.A.M., Khanji, I.M. & Airout,
R.M., Investigating the Impact of Minimum
Wages on Jordan’s Industrial Exports, WSEAS
Transactions on Business and Economics,
Vol.19, 2022, pp. 924–937.
https://doi.org/10.37394/23207.2022.19.81.
[18] Alonso, C., Beyond Labor Market Outcomes:
The Impact of the Minimum Wage on
Nondurable Consumption, The Journal of
Human Resources, Vol.57, 2022, pp. 1690–
1714. https://doi.org/10.3368/jhr.58.1.0518-
9524R2.
[19] Topalović, A. & Hampel, D., Causes of the
“brain drain” Problem in Selected Western
Balkan Countries, WSEAS Transactions on
Business and Economics, Vol.20, 2023, pp.
2300-2314.
https://doi.org/10.37394/23207.2023.20.198.
[20] Economides, G. & Moutos T., Worker
Heterogeneity and the Popularity of the
Minimum Wage Institution, Review of
Economic Analysis, Vol.11, No.1, 2019.
[21] EU, Directive (EU) 2022/2041 of the
European Parliament and of the Council of 19
October 2022 on adequate minimum wages in
the European Union, PE/28/2022/REV/1, OJ
L 275/33, 2022.
[22] Gulaliyev, M., Veliyeva, S., Sultanova, N.,
Mehdiyeva, I. & Gulaliyev, E., Impact of
Minimum Wage Policy on Income Inequality:
Azerbaijan Case, WSEAS Transactions on
Business and Economics, Vol.20, 2023, pp.
2121-2137.
https://doi.org/10.37394/23207.2023.20.185.
[23] Lee, D. S., Wage inequality in the United
States during the 1980s: Rising dispersion or
falling MW?, The Quarterly Journal of
Economics, Vol.114, No.3, 1999, pp. 977–
1023.
[24] ILO, Global Wage Report 2020–21: Wages
and minimum wages in the time of COVID-19,
International Labour Office: Geneva, 2020,
[Online].
https://www.ilo.org/wcmsp5/groups/public/---
dgreports/---dcomm/---
publ/documents/publication/wcms_762534.pd
f (Accessed Date: June 13, 2024).
[25] Dolton, P., Bondibene, C. R. & Wadsworth,
J., The UK National Minimum Wage in
Retrospect, Fiscal Studies, Vol.31, 2010, pp.
509–534. https://doi.org/10.1111/j.1475-
5890.2010.00123.x.
[26] Dube, A., Impacts of Minimum Wages:
review of the international evidence, HM
Treasury Report, [Online].
https://www.gov.uk/government/publications/
impacts-of-minimum-wages-review-of-the-
international-evidence (Accessed Date: June
13, 2024).
[27] Neumark, D. & Wascher, W., Minimum
Wages, Labor Market Institutions, and Youth
Employment: A Cross-National Analysis, ILR
Review, Vol.57, No.2, 2004, pp. 223–248.
https://doi.org/10.1177/001979390405700204
[28] Kahn, L. M., Wage Inequality, Collective
Bargaining, and Relative Employment from
1985 to 1994: Evidence from Fifteen OECD
Countries, The Review of Economics and
Statistics, Vol.82, No.4, 2000, pp. 564–579.
https://doi.org/10.1162/003465300559055.
[29] Bossler, M. & and Gerner, H.-D.,
Employment Effects of the New German
Minimum Wage: Evidence from
Establishment-Level Microdata, ILR Review,
Vol.73, No.5, pp. 1070–1094.
https://doi.org/10.1177/0019793919889635.
[30] Harasztosi, P. & Lindner, A., Who Pays for
the Minimum Wage?, American Economic
Review, Vol.109, No.8, 2019, pp. 2693–2727.
https://doi.org/10.1257/aer.20171445.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1521
Volume 21, 2024
Contribution of Individual Authors to the
Creation of a Scientific Article (Ghostwriting
Policy)
The authors equally contributed in the present
research, at all stages from the formulation of the
problem to the final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
This work was supported by the Internal Grant
Agency PEF MENDELU, No. IGA-PEF-TP-22-
009.
Conflict of Interest
The authors have no conflicts of interest to declare.
Creative Commons Attribution License 4.0
(Attribution 4.0 International, CC BY 4.0)
This article is published under the terms of the
Creative Commons Attribution License 4.0
https://creativecommons.org/licenses/by/4.0/deed.en
_US
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.123
Natália Várošová,
Lenka Viskotová, David Hampel
E-ISSN: 2224-2899
1522
Volume 21, 2024
