Abstract
The recent increases in the minimum wage in Romania represent a popular topic at the national level, which indicated that aggressive increases in the minimum wage could create a competitiveness problem in the context of a relatively high level of informal economic activities. The main objective of this chapter is to measure the effects of the minimum wage on Romanian informal activities based on the sharp increases in the minimum wage observed in the recent periods and the new increase planned by the government in the future using quarterly data for the period 2000–2015. The size of the SE was estimated using the MIMIC model, and the empirical results reveal that unemployment, self-employment, indirect taxation and lack of trust in government can be considered causes of Romanian informality. The empirical results indicate that an increase in the minimum wage can be considered a longterm supporting factor for the shadow economy because it increases informal economic activities, as firms will seek alternative methods of circumventing authorities.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
PFA (Authorized Physical Person) or those who work in agriculture.
- 2.
The lighthouse effect means that the official minimum wage is regarded as a benchmark for the entire economy and the uncovered sector.
- 3.
In addition, the minimum wage is defined as the lowest remuneration that employers may legally pay to workers, and it is considered the price floor below which workers may not sell their labour.
- 4.
Turkey, Serbia, Montenegro, Albania and former Yugoslav Republic of Macedonia.
- 5.
Main source is the Earnings Database of Eurostat.
- 6.
The main reason for selecting this year was the lack of available data for the last 2 years 2015 and 2016.
- 7.
In the model, we have also included other perception indices (economic freedom, freedom from corruption, fiscal freedom, labour freedom, rule of law, government effectiveness and control of corruption); however, their coefficients were not statistically significant.
- 8.
The main advantage is that it offers the same parameters as the ML estimates, although the standard errors are corrected.
- 9.
By dividing it to the total population (15 years and over).
- 10.
It was obtained by dividing the nominal monthly minimum wage (RON) to CPI (2005=100).
- 11.
Employment and unemployment and consumer price index.
- 12.
References
Abowd JM, Kramarz F, Margolis DN (1999) Minimum wages and employment in France and the United States (No. w6996). National Bureau of Economic Research
Adam AM, Tweneboah G (2009) Foreign direct investment and stock market development: Ghana’s evidence. Int Res J Financ Econ 26:178–185
Anastassiou T, Dritsaki C (2005) Tax revenues and economic growth: an empirical investigation for Greece using causality analysis. J Soc Sci 1(2):99–104
Andreica ME, Cataniciu N (2009) Models of minimum wage impact upon employment in Romania. Revista “Calitatea – Acces la succes”, vol 10, nr. 101 Special, Editura Cibernetica MC, Bucureşti, ISSN 1582-2559. http://conferinta.academiacomerciala.ro/sIMPOZION%202009.pdf. BDI (SCOPUS, EBSCO, CABELL’S, PROQUEST)
Andreica ME, Cristescu A, Pirciog S (2011) Simulation scenarios of employment on the Romanian labor market. In: Proceedings of the 2nd international conference on applied informatics and computing theory, pp 260–264
Betcherman G (2012) Labor market institutions: a review of the literature. World Bank Policy Research Working Paper, 6276
Boeri T, Garibaldi P, Ribeiro M (2011) The lighthouse effect and beyond. Rev Income Wealth 57(S1):S54–S78
Bhorat H, Kanbur R, Mayet N (2013) The impact of sectoral minimum wage laws on employment, wages, and hours of work in South Africa. IZA J Labor Dev 2(1):1
Card D, Krueger AB (1995a) Myth and measurement: the new economics of the minimum wage. Princeton University Press, Princeton, pp 1, 6–1, 7
Card D, Krueger AB (1995b) Time-series minimum-wage studies: a meta-analysis. Am Econ Rev 85(2):238–243
Card D, Krueger AB (2000) Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania: reply. Am Econ Rev 90(5):1397–1420
Carneiro F (2000) Time series evidence on the employment effect of minimum wages in Brazil. Available at SSRN 231875
Carneiro F (2004) Are minimum wages to blame for informality in the labour market? Empirica 31(4):295–306
Carneiro FG, Corseuil CH (2001) The impact of minimum wage changes on employment and wages in Brazil: evidence from time series and longitudinal data
Carneiro F, Henley A (2001) Modelling formal vs. informal employment and earnings: micro-econometric evidence for Brazil. University of Wales at Aberystwyth Management & Business Working Paper, 2001-15
Comola M, De Mello L (2011) How does decentralized minimum wage setting affect employment and informality? The case of Indonesia. Rev Income Wealth 57(S1):S79–S99
Currie J, Fallick BC (1996) The minimum wage and the employment of youth: evidence from the Nlsy. J Hum Resour 31:404–428
Davidescu AA, Strat VA (2015) The relationship between official employment, official unemployment and unofficial employment in Romania. Int J Econ Pract Theories 5(3):181–186
Dell’Anno R (2003) Estimating the shadow economy in Italy: a structural equation approach. Working Paper 2003–7, Department of Economics, University of Aarhus
Dell’Anno R (2007) The shadow economy in Portugal: an analysis with the MIMIC approach. Appl Econ J 10(2):253–277
Dell’Anno R, Solomon OH (2007) Shadow economy and unemployment rate in USA: is there a structural relationship? An empirical analysis. Appl Econ 1–19
Dell’Anno R, Gómez-Antonio M, Pardo A (2007) The shadow economy in three Mediterranean countries: France, Spain and Greece. A MIMIC approach. Empir Econ 33(1):51–84
Dickens R, Machin S, Manning A (1999) The effects of minimum wages on employment: theory and evidence from Britain. J Labor Econ 17(1):1–22
Dinkelman T, Ranchhod V (2012) Evidence on the impact of minimum wage laws in an informal sector: domestic workers in South Africa. J Dev Econ 99(1):27–45
Doornik JA, Hansen H (2008) An omnibus test for univariate and multivariate normality. Oxf Bull Econ Stat 70:927–939
European Commission (2015) Macroeconomic imbalances Country Report – Romania 2015, Occasional Papers 223, June 2015, ISSN 1725-3209 (online), http://ec.europa.eu/economy_finance/publications/occasional_paper/2015/pdf/ocp223_en.pdf
Fajnzylber P (2001) Minimum wage effects throughout the wage distribution: evidence from Brazil’s formal and informal sectors. Working Paper Series 151, Centro de Desenvolvimento e Planejamento Regional, Belo Horizonte, Brazil
Fialová K, Schneider O (2011) Labor institutions and their impact on shadow economies in Europe. World Bank Policy Research Working Paper Series
Giles DEA, Tedds LM (2002) Taxes and the Canadian underground economy. Canadian Tax paper n.106. Canadian Tax Foundation. Toronto
Gindling TH, Terrell K (2002) The effects of minimum wages on the formal and informal sector: evidence from Costa Rica. Unpublished Paper
Gindling TH, Terrell K (2005) The effect of minimum wages on actual wages in formal and informal sectors in Costa Rica. World Dev Elsevier 33:1905–1921
Gindling TH, Terrell K (2007) The effects of multiple minimum wages throughout the labour market: the case of Costa Rica. Labour Econ 14:485–511
Hazans M (2011) Informal workers across Europe: evidence from 30 European countries. World Bank Policy Research Working Paper, 5912
Henze N, Zirkler B (1990) A class of invariant consistent tests for multivariate normality. Commun Stat Theory Methods 19:3595–3617
Hohberg M, Lay J (2015) The impact of minimum wages on informal and formal labor market outcomes: evidence from Indonesia. IZA J Labor Dev 4(1):1
Johansen S (1991) Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica 59:1551–1580
Khamis M (2008) Does the minimum wage have a higher impact on the informal than on the formal labor market? Evidence from quasi-experiments. IZA Discussion Papers 3911. Institute for the Study of Labor (IZA), Bonn
Khamis M (2013) Does the minimum wage have a higher impact on the informal than on the formal labour market? Evidence from quasi-experiments. Appl Econ 45(4):477–495
Krstić G, Schneider F (2014) Formalizing the shadow economy in Serbia. Springer, Cham. ISBN: 978-3-319-13436-9
Lemos S (2004) The effects of the minimum wage in the formal and informal sectors in Brazil. IZA Discussion Paper No. 1089. Bonn
Lütkepohl H (2007) New introduction to multiple time series analysis. Springer, New York
Machin S, Manning A (1994) The effects of the minimum wages on wage dispersion and employment: evidence from the U.K. wage councils. Ind Labor Relat Rev 47(2):319–329
Magruder JR (2013) Can minimum wages cause a big push? Evidence from Indonesia. J Dev Econ 100(1):48–62
Maloney WF (1998) Are labor markets in developing countries dualistic? The World Bank, Washington, DC
Maloney W, Mendez J (2004) Measuring the impact of minimum wages. Evidence from Latin America. In: Law and employment: lessons from Latin America and the Caribbean. University of Chicago Press, Chicago, pp 109–130
Mardia KV (1970) Measures of multivariate skewness and kurtosis with applications. Biometrika 57:519–530
Mcintyre F (2002) How does the minimum wage affect market informality in Brazil. Unpublished Paper
Mocanu C, Zamfir AM, Lungu E, Militaru E (2012) School-to-work transition of higher education graduates in four Eastern European countries. Maastricht School of Management, Working Paper (2012/15)
Muravyev A, Oshchepkov AY (2013) Minimum wages and labor market outcomes: evidence from the emerging economy of Russia. Higher School of Economics Research Paper No. WP BRP, 29
Neri M (1997) A Efetividade Do Salario Minimo No Brasil: Pobreza, Efeito-Farol E Padroes Regionais. Unpublished Paper
Neumark D, Wascher W (1992) Employment effects of minimum and subminimum wages: panel data on state minimum wage laws. Ind Labor Relat Rev 46(1):55–81
Neumark D, Schweitzer M, Wascher W (2000) The effects of minimum wages throughout the wage distribution (No. w7519). National Bureau of Economic Research
Packard TG, Koettl J, Montenegro C (2012) In from the shadow: integrating Europe’s informal labor. World Bank
Pesaran HH, Shin Y (1998) Generalized impulse response analysis in linear multivariate models. Econ Lett 58(1):17–29
Popescu ME, Stanilă L, Cristescu A (2015) A gender analysis of the minimum wage effects upon employment in Romania. In: Proceedings of the IE 2015 international conference, pp 444–449. ISSN 2284–7472. https://ideas.repec.org/a/agr/journl/vxxy2013ispecial-iip417-429.html. BDI (EBSCO, REPEC, CABELL’S, ISI Web of Knowledge)
Pirciog S, Ciuca V, Popescu ME (2015) The net impact of training measures from active labour market programs in Romania–subjective and objective evaluation. Procedia Econ Finance 26:339–344
Razmi MJ, Falahi MA, Montazeri S (2013) Institutional quality and underground economy of 51 OIC member countries. Universal Journal of Management and Social Sciences, 3
Rei D, Bhattacharya M (2008) The impact of institutions and policy on informal economy in developing countries: an econometric exploration. ILO, Geneva
Schneider F (2005) Shadow economies around the world: what do we really know? Eur J Polit Econ 21(3):598–642
Schneider F, Buehn A, Montenegro CE (2010) New estimates for the shadow economies all over the world. Int Econ J 24(4):443–461
Tokman VE (2001) Integrating the informal sector in the modernization process. SAiS Rev 21(1):45–60
Zamfir AM, Maer-Matei MM, Mocanu C (2015) “Skills proficiency and wages in Germany and UK” in The Turkish Online Journal of Educational Technology, July, Special Issue 2 for INTE 2015, pp 487–492. ISSN: 2146-7242
Further Reading
Earnings Database, Eurostat
Employment and Unemployment database, Eurostat
EurWORK Network of European correspondents. http://www.eurofound.europa.eu/observatories/eurwork/articles/working-conditions-industrial-relations/statutory-minimum-wages-in-the-eu-2016
Eviews 8.1 software
ILO, World employment report 2004-05. Employment, productivity and poverty reduction, 2004. http://www.ilo.org/global/publications/ilo-bookstore/order-online/books/WCMS_PUBL_9221148130_EN/lang%2D%2Den/index.htm
Ministerul Muncii. www.mmuncii.ro
Monthly Bulletins of National Bank of Romania, 2000–2015. www.bnr.ro
Quarterly Government Finance Statistics database, Eurostat
Quarterly Labor Force Survey database, Eurostat
Quarterly Monetary and Financial Statistics database, Eurostat
Quarterly National Accounts database, Eurostat
Stata 13 software
Tempo database, National Institute of Statistics
Acknowledgements
We are grateful to the National Scientific Research Institute for Labour and Social Protection Romania for funding the empirical research within the project PN 16440102 entitled “The impact of labour market institutions on informality. Micro and macro approaches”.
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Appendices
Appendix 1 Minimum Wages, January 2016 (PPS per Month)
(PPS per month) | ||
|---|---|---|
Group 1 | Albania | 329 |
Romania | 445 | |
Bulgaria | 449 | |
FYR of Macedoniaa | 458 | |
Serbia | 480 | |
Group 2 | Montenegrob | 519 |
Latvia | 528 | |
Lithuania | 557 | |
Czech Republic | 564 | |
Estonia | 569 | |
Slovakia | 597 | |
Croatia | 618 | |
Hungary | 625 | |
Portugal | 756 | |
Poland | 792 | |
Greece | 800 | |
Spain | 828 | |
Malta | 900 | |
Turkey | 947 | |
Sloveniab | 968 | |
Group 3 | United States | 1028 |
United Kingdom | 1133 | |
Ireland | 1265 | |
France | 1361 | |
Netherlands | 1373 | |
Belgium | 1382 | |
Germany | 1451 | |
Luxembourg | 1597 |
Appendix 2 The Distribution of Proportion of Minimum Wages by EU Countries in 2014
Notes: (1) NACE Rev. 2 Sections B–S. Denmark, Germany, Italy, Cyprus, Austria, Finland and Sweden: no national minimum wage in 2014. (2) 2013. (3) 2010. (4) Excluding NACE Rev. 2 Section O. (5) Excluding NACE Rev. 2 Sections O–Q. (6) 2011. Source: Eurostat (online data code: earn_mw_avgr2)
Appendix 3 National Minimum Gross Guaranteed Wage, 2000–2016
Starting date | Value in lei | Value in EUR | Legislation |
|---|---|---|---|
1 May 2016 | 1250 RON | 275 | HG 1017/2015 |
1 July 2015 | 1050 RON | 236 | HG 1091/2014 |
1 January 2015 | 975 RON | 216 | |
1 July 2014 | 900 RON | 205 | HG 871/2013 |
1 January 2014 | 850 RON | 189 | |
1 July 2013 | 800 RON | 179 | HG 23/2013 |
1 February 2013 | 750 RON | 171 | |
1 January 2012 | 700 RON | 155 | HG 1225/2011 |
1 January 2011 | 670 RON | 159 | HG 1193/2010 |
1 January 2009 | 600 RON | 142 | HG 1051/2008 |
1 October 2008 | 540 RON | 142 | HG 1051/2008 |
l January 2008 | 500 RON | 140 | HG 1507/2007 |
l January 2007 | 390 RON | 114 | HG 1825/2006 |
1 January 2006 | 330 RON | 90 | HG 1766/2005 |
l January 2005 | 310 RON | 85 | HG 2346/2004 |
I January 2004 | 2,800,000 ROL | 70 | HG 1515/2003 |
l January 2003 | 2,500,000 ROL | 65 | HG 1105/2002 |
1 March 2002 | 1,750,000 ROL | 62 | HG 1037/2001 |
1 March 2001 | 1,400,000 ROL | 56 | HG 231/2001 |
1 December 2000 | 1,000,000 ROL | 45 | HG 1166/2000 |
1 February 2000 | 700,000 ROL | 39 | HG 101/2000 |
1 May 1999 | 450,000 ROL | 28 | HG 296/1999 |
Appendix 4 The Description and Source of the Data
Variables | Description | Sources |
|---|---|---|
Variables used in the estimation of the shadow economy | ||
Fiscal regime | Total fiscal revenues/GDP, % | Quarterly Government Finance Statistics, Eurostat |
Direct taxes | Current taxes on income, wealth/GDP, % | Quarterly Government Finance Statistics, Eurostat |
Indirect taxes | Taxes on production and imports/GDP, % | Quarterly Government Finance Statistics, Eurostat |
Social contributions | Net social contributions/GDP, % | Quarterly Government Finance Statistics, Eurostat |
Unemployment rate | Unemployment rate represents the ratio of the unemployed, according to international definition (ILO*), in economically active population, % | Labour Force Survey, Eurostat |
Self-employment | Self-employed persons are the ones who work in their own business, farm or professional practice. A self-employed person is considered to be working if she/he meets one of the following criteria: works for the purpose of earning profit, spends time on the operation of a business or is in the process of setting up his/her business Self-employed persons/active population, % | Labour Force Survey, Eurostat |
Government consumption | Final consumption expenditure of general government/GDP, %. It is a proxy for the size of government General government final consumption expenditure (formerly general government consumption) includes all government current expenditures for purchases of goods and services (including compensation of employees) | Quarterly Government Finance Statistics of Eurostat |
Part-time employment as a percentage of the total employment | Part-time employment rates represent persons employed on a part-time basis as a percentage of the same age population, % | Labour Force Survey, Eurostat |
Government employment | Government employment/active population, % | Labour Force Survey, Eurostat |
Regulatory Quality (X10) | Worldwide Governance Indicators, WB | Reflects perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development The scores of this index lie between −2.5 and 2.5, with higher scores corresponding to better outcomes |
Rule of law (X11) | Worldwide Governance Indicators, WB | Reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence |
Index of real GDP (2005=100) | Chain-linked volumes, index 2005=100 | Quarterly National Accounts database of Eurostat |
C/M1 | C/M1, %. It corresponds to the currency outside the banks as a proportion of M1 | Monthly Bulletins of National Bank of Romania |
Labour force participation rate | Labour force participation rate, % It corresponds to the labour force participation rate, total (percentage of total population). Labour force participation rate is the proportion of the population that is economically active: all people who supply labour for the production of goods and services during a specified period | Labour Force Survey, Eurostat |
Variables used in the analysis of the relationship between minimum wage and the size of the shadow economy | ||
Ln SE per capita | Natural logarithm of the real SE activity per capita divided by CPI (2005=100) | |
SE per capita | SE activity per capita percentage of GDP | |
Log(realMW) | Log of the real monthly minimum wage (RON per capita) | Tempo database, National Institute of Statistics |
MQCS | The minimum wage as a ratio of average gross earnings (%) | Employment and unemployment and consumer price index databases of Eurostat, Tempo database, National Institute of Statistics |
MWGDP per capita | The minimum wage as a ratio of GDP per capita (%) | Employment and unemployment and consumer price index databases of Eurostat, Tempo database, National Institute of Statistics |
Official economy | GDP per capita | National Accounts database, Eurostat |
Rights and permissions
Copyright information
© 2019 Springer Nature Switzerland AG
About this chapter
Cite this chapter
Davidescu, A.A.M., Schneider, F. (2019). The Minimum Wage Fuels Romania’s Shadow Economy?. In: Ratten, V., Jones, P., Braga, V., Marques, C.S. (eds) Subsistence Entrepreneurship. Contributions to Management Science. Springer, Cham. https://doi.org/10.1007/978-3-030-11542-5_9
Download citation
DOI: https://doi.org/10.1007/978-3-030-11542-5_9
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-11541-8
Online ISBN: 978-3-030-11542-5
eBook Packages: Business and ManagementBusiness and Management (R0)