INTRINSIC AFTERSHOCKS OF INDEXING STATUTORY MINIMUM WAGE TO AVERAGE WAGE

Abstract

The European Union (EU) is determined to prevent the statutory minimum wage from falling behind. The relevant directive gives as examples the average and median wages to which the minimum wage could be indexed. I argue that the first approach inevitably goes hand in hand with ever-present and interfering shockwaves, especially in economies with a right-skewed wage distribution. In addition to the analytical derivation, I quantify the impacts on the EU under various assumptions regarding wage distribution and target ratio. From a minimax perspective, indexing to the median is recommended.