Chapter 5: Setting and adjusting minimum wage levels

5.2 How frequently should minimum wages be adjusted?

ILO Conventions and Recommendations

Convention No. 131 considers that minimum wages should be "adjusted from time to time (Article 4).”

The accompanying Minimum Wage Fixing Recommendation, 1970 (No. 135), further clarifies that “Minimum wage rates should be adjusted from time to time to take into account changes in the cost of living and other economic conditions.” In principle, this revision can take place “either at regular intervals or whenever such a review is considered appropriate in the light of the variations in a cost-of-living index”.

The advantages of regular adjustments

Governments and social partners can in principle agree to revise the minimum wage whenever they consider it necessary. However, in the absence of fixed periodicity, both workers and employers will be affected by some uncertainty.

Workers who receive a minimum wage do not know for how long price inflation will erode their purchasing power, while employers do not know when they might suddenly face an abrupt increase in their labour costs. Indeed, it has been observed that in countries without fixed periodicity, minimum wages sometimes remain unadjusted for long periods followed by sudden and large adjustments. This not only weakens the relevance of the minimum wage, but also makes it more challenging for enterprises to absorb the cost increases.

Most frequently, countries adjust their minimum wages once a year. Some countries, adjust rates every six months, while others have 2-years intervals. Annual adjustments seem adequate in periods of low or moderate inflation, providing workers and employers with appropriate predictability and allowing for regular adjustments, in line with evolving economic circumstances.

What to do if there is high inflation?

Yearly adjustments allow for predictability and smooth adjustments, and can be complemented by more frequent adjustments when inflation exceeds some threshold.

In some countries, when inflation accelerates above a certain threshold, more frequent adjustments are automatically applied. In France, for example, the minimum wage is automatically increased whenever price inflation exceeds 2 per cent within a given year.

Automatic indexation above a certain level, however, can be risky and lead to inflationary wage-price “spirals” in situations of sharply accelerating inflation.