Table of Contents

1 Introduction....3 2 Theoretical background .............................................................................. 4 2.1 Overview and the initial goal of minimum wage ............................ 4 2.2 Some of the impacts ............................................................................ 5 3 Case of albania ............................................................................................ 7 3.1 General description and legal aspect .................................................. 7 3.2 Minimum wage versus cost of living ..............................................10 4 Conclusions ...............................................................................................12 5 References..................................................................................................13

1 Introduction
If somebody had asked us some time ago why this topic on the minimum wage, we wouldnt really have much information as to respond correctly. Therefore we decided to ask and what we realized were really interesting. First we asked a cleaning employee if she was satisfied with her wage and if it met her needs and those of her family. The answer, although coming from a person without higher education was really smart. She said: My wage has not changed since five years and even working conditions, while prices have tripled and so me and my family are living through difficulties. Secondly we asked a state administration employee with a wage above the average one, who in addition was treated by the state with incentives of service, food handling, health, etc. The answer in this case was short: We always want to have more, but to speak frankly were quite good at the moment. This made us think about this topic. The purpose of this paper is to give a general view on the minimum wage while also analyze it theoretically, but in particular to study its relationship with the economic situation of those who benefit from it. However in a paper of few pages we could not include everything, so we have excluded from the analysis most of the consequences that may result because of the minimum wage as unemployment, we studied it in an entirely competitive market and concentrated mainly in the case of Albania. Briefly, in this paper we have seen the problem of the minimum wage in a historical and theoretical point of view, and then we specifically addressed the case of Albania. At this point we stopped at a glance the overall performance of the minimum wage in Albania and tried to prove if minimum wage is enough for a normal living expense.

2 Theoretical background
The following chapter presents a historical overview on the minimum wage and the reasons why it was born. Following the chapter is the theoretical analysis of its setting and relationship with the welfare of those who benefit from it. The purpose of the chapter is to clarify the theoretical basis on which operates the observation made in chapter offspring for the case of Albania. 2.1 Overview and the initial goal of minimum wage The global financial crisis that has spread around the world has caused a considerable slowdown in most developed countries and has already affected financial markets and growth prospects in developing countries (Marone, 2009). The impact on the Albanian economy, one of the poorest in Europe, is yet to be determined and it expected that the full extent of the crisis will not be felt until a later moment due to the lack of full integration in the global markets. ... on the central issue of the level of the minimum wage, the Commission negotiated increases sensitive to the shifting power relations in the product and labor markets... The consensus did not emerge simply from discussion or sweet reasons, but shifting power relations...The stated goal was initially to "help as many as possible low-paid workers without adverse effects on the economy".1 At a first glance it may be naive to state that a minimum wage is the lowest wage a worker should earn because that means underestimating the institution of the minimum wage as a fundamental economic tool. A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers; equivalently, it is the lowest wage at which workers may sell their labor.2 Although the definition is of course meaningful further approach is needed since the beginning of the issue. From the historical point of view the first steps of the minimum wage regulation were set by the Hammurabi Code, 2000 B.C., but the first concrete legislation is generally considered to have first developed in New Zealand and Australia. The minimum wage was first used in these two countries as a procedure for the prevention of industrial disputes. According to the New Zealand Industrial Conciliation and Arbitration Act of 1894, the court was given power to fix minimum wages that could be made binding for all workers in the industry where the dispute had taken place. Meanwhile there were also attempts of using minimum wage regulation against sweating3 ; in which many low-skilled adult women and youth workers were employed, paid not fairly and the employer gained iniquitous power over them. Over the years, the goal of minimum wage changed from the elimination of negative phenomena such as
1 2 3

W.Brown,f2007,p.431 Investopedia,2012

The payment of exceptionally low wages, the interested reader should see Wikipedia,2012

"sweating" and the Industrial Dispute, in helping mostly low-wage workers. The idea was to help people have a better and satisfactory living. So it was born as an alternative method or economic tool with a regulatory purpose. Despite the main goal, a special attention was provided to avoid negative effects on the economy that could bring this legislated minimum wage. 2.2 Some of the impact Setting the minimum wage certainly brought many comments from civil society, but especially from specialized groups such as: economists, politicians, businesses and others affected directly by this new policy. To better understand the logic of its operation, must first understand the theoretical aspect and the consequences it can bring to the society and the economy. We will develop a theoretical analysis below to study the minimum wage market by taking it as a competitive market. League to be given to this approach is between the minimum wage level, which is nothing else but the price of labor, and the amount of labor, which is given in hours. The purpose of this analysis is to find consistency between the minimum wage, price and consequently the standard of living, however simplifying the problem from the issue of employment because this is not the purpose of this paper. The main effect that we want to examine is whether this wage setting increases or not the welfare of the poorest, so if after placing it theyll be able to afford living or even better to improve it. Well explain the theory graphically and place the minimum wage on the vertical axis and the amount of work in the horizontal axis. Fig.1 Wage market wage Min wage S

Q1

Q2

labor 5

Source: Economics help (2012), own designe

The graphical analysis ( Fig.1 ) constitutes the common explanation of economic equilibrium as the intersect of the demand and the supply curve. In the absence of minimum wage, the market would be the one that determines the equilibrium minimum wage, which as seen in the figure is the point E, in which the demand quantity would be equal to the supply one. If the state or a collective bargain decides to set the minimum wage above the equilibrium, we would have increased it artificially. From this graph we see that for this wage the demand (Q 1 ) and the supply quantity (Q 2 ) do not match with each other. It is clear that the amount of work required is less than the amount of it supplied, creating an excess supply, which means that more people will be seeking for work while firms require fewer workers than are available in the market. Therefore, the theory suggests a somewhat superficial view that setting the minimum wage will bring unemployment, however this issue despite its pros and cons is not our main objective. But we can certainly find another relationship, treating wage as a price, which means that we had a price level given by the balance in the market and raised its level in general. In economics this is nothing else but inflation as a result of this economic policy. A rash person would immediately say that since wages have increased people will have more money to spend, will be happier and their welfare will increase as well. In fact this will not happen always because people will really be paid better, but inflation and the reaction of businesses will not be the most friendly. The cost of a firm is in addition to other things, even a function of the wage it gives to its employees, so companies will not be very happy with this forced increase of wage and can react in two different ways. First they may cut out work hours to reduce costs or reduce the number of its employees. Secondly, the firm may pass this raise of costs to the costumer by rising the prices of its products offered in the market, which means that the same employee whose wage has already increased is now the customers who should bear higher prices in market. So even though workers will get paid a bit better than before, they will have to face the problem of unemployment or inflation.

3 Case of Albania
In this topic we are going to make a general description about minimum wage, its changes over years, the law in our country, but we also are going to see if this minimum wage is enough for a normal living, by getting a limited basket of goods and services required for a family. 3.1 General description and legal aspect Wages have changed quite a lot these last 20 years. For the first time, in 1992, consumer price indexing was used to determine the minimum wage. The biggest changes have occurred in the years 1990-2000.Before the period of transition, wage levels in Albania were the lowest compared with other European countries. The economic crisis that affected our country in the early 90s further aggravated the situation. For this reason a program was followed which included radical reforms market that were implemented in the hope of stimulating economic growth. An important part of this program was restrictive income policy in order to limit inflation. Real wages fell by almost 50% between the year 1991 and 1994. Another reason that influenced curb wage increases, but not the only reason, was the crisis in 1997. Enterprises, especially The most profitable enterprises, were detained from paying higher wages by strict wage controls.4 A range of instruments were used to control wage growth: direct limits on average wages, wage tariffs, control of the minimum wage, wage compensation for inflation instead of an indexation system. In our county there are no regular negotiations between government, trade unions and employers representatives on the minimum wage. Its level has only been adjusted intermittently by government decision. 5 Decision for Defining the minimum wage, in the whole country Pursuant to Section 100 of the Constitution, article 111, the law nr.7961, dated 12.07.1996, "Code of Labor of the Republic of Albania", as amended, and Article 4 of Law No. 10 405, dated 24.3.2011, "For the powers in setting wages and bonuses" on the proposal of the Minister of Labour, Social Affairs and Equal Opportunities and the Minister of Finance, the Council of Ministers Decided: 1. Minimum monthly basic pay for employees in the whole country, required to be implemented by any person, natural or juridical, domestic or foreign, is 20 000 (twenty thousand) lek.
4 5

UNICEF,2000,p.26 ILO,2004,pp.24

2. Minimum monthly basic pay given to 174 (one hundred and seventy-four) hours of work per month, performed during normal working time. 3. Minimum basic wage schedules to be 115 (one hundred and fifteen) ALL. 4. Extra payments are based on the basic salary. 5. The decision nr.566, dated 14.7.2010, the Council of Ministers, "On determining the minimum wage in the whole country, is repealed. This decision shall enter into force after publication in the Official Gazette" and the financial effects of extending the date 1 July 2011. PRIME MINISTER SALI BERISHA6 To obtain a clear picture of the performance of the minimum wage during the years (19922009), we provide the chart given below: Fig .2 Change of minimum wage in %

Source: INSTAT(2012) and own calculation

After a careful observation of the performance of minimum wage changes (Fig.2), we see that a large increase in the minimum wage was in 1993 with 103,33% (from 1200 ALL to 2440 ALL). While the lowest growth experienced during this period was in 2011 with 5,263% (except the 1996, 2006, 2009 where there is no change, 0% ) what is to be noted is that in the last 20 years, legislated minimum wage has increased despite the increased level, thus justifying the purpose of increasing welfare (from 2009 to 2010 the minimal wage was

Council of Ministers,2012

increased from 18000 ALL to 19000 ALL and from 2010 to 2011 the minimum wage was increased from 19000 ALL to 20000 ALL).

The Albanian government, as every year, has developed a draft decision for increasing the minimum wage, which is expected to become effective from 1 July 2012. According to the government draft, minimum wage will be increased to 21 thousand from 20 thousand that is actually. However, the final decision expected to be received on 22 June by the National Labour Council. Increasing the minimum wage this year is especially opposed fasonit businesses, which consider a burden too heavy for them, at a time when their businesses are faced with declining orders from international partners, reflected exports fall the fasonit by about 4% on annual basis for the first four months of this year. Decision for Defining the minimum wage, in the whole country Pursuant to Section 100 of the Constitution, article 111, the law nr.7961, dated 12.07.1996, "Code of Labor of the Republic of Albania", as amended, and Article 4 of Law No. 10 405, dated 24.3.2011, "For the powers in setting wages and bonuses" on the proposal of the Minister of Labour, Social Affairs and Equal Opportunities and the Minister of Finance, the Council of Ministers Decided:

1. Minimum monthly basic pay for employees in the whole country, required to be implemented by any person, natural or juridical, domestic or foreign, is 21,000 (twenty thousand). leks.

2. Minimum monthly basic pay given to 174 (one hundred and seventy-four) hours of work per month, performed during normal working time. 3. Minimum basic wage schedules to be 121 (one hundred twenty-one) ALL. 4. Extra payments are based on the basic salary. 5. The decision nr.527, dated 20.7.2012, the Council of Ministers, "On determining the 9

minimum wage in the whole country, is repealed. This decision shall enter into force after publication in the Official Gazette" and the financial effects of extending the date 1 July 2012. PRIME MINISTER SALI BERISHA8

3.2 Minimum wage versus cost of living Beyond approvals and objections to decide whether or not minimum wage, another issue to be reviewed after its adoption is whether it fulfills the minimum essential needs. In this context we have chosen a limited basket of goods and services required for a family of four members (the type of four-member family has the highest percentage in Albania). We assumed that this family consists of two parents who receive minimum wage and their two children. Below is the selected basket which consists on goods and services that a person needs to consume and its consumption is calculated according to average prices and quantities needed for a month. .It is taken from the CPI table.7 A limited basket of goods and services for a family of four members Food, and non-alcoholic beverages Bread and cereals 1750ALL Meat/ Fish 5500ALL Milk, cheese, and eggs 4000ALL Oils and fats 1500ALL Fruits 5000ALL Vegetables included potatoes 8000ALL Sugar/salt, honey, chocolates and sweets 400ALL Non-alcoholic beverages 700ALL Coffee, tea and cacao 700ALL Tobacco Tobacco 4000ALL Water, fuel and power Supplying with water 600ALL Fuel and power 4500ALL Telephone
7

INSTAT,2012

National minimum wage,2011 10

Telephone service (fix and mobile) 3000ALL Furniture household and maintenance Goods and services for household 2500ALL Transport Transport (bus ticket) 2400ALL Medical care maintenance

Medical products,appliances and equipments2000ALL

SUM=46 550 ALL

According to the basket we have taken above results that the minimum cost for the vital needs reaches the value 46 550 ALL. As compared to the total net wages that both parents get (after we removed an average of 16% liability for social security, health and other taxes), 33 600 ALL, results that the cost of living is 12,950 ALL higher than total revenues of the family. This gap of 12 950 ALL will expand even more if we added other goods and services for an average living such as clothing, maintenance costs for vehicles, household furniture, recreation and culture, education services, hotels, restaurants and coffee-house, personal care, rent, hospital services, etc. Finally, we arrived at the conclusion that minimum wages set by the Albanian government fails to cover the cost of a minimal living for an average family of four members.

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4 Conclusions
Returning to our initial goal which was to present a general overview, a theoretical analysis and the connection between minimum wage and standard of living. After the compilation of the paper above, we concluded that minimum wage is one of the main economic tools government or collective bargains use with a regulatory aim. According to the theoretical background we presented, minimum wage was born about a hundred years ago with the purpose of helping low-paid workers and families to become more self-sufficient. The main impact we studied above was its consequence to the standard of living. We focused in the case of Albania and selected a basket of goods and services for a normal family enough for living. After comparing the revenues with the cost of the chosen basket, we found out that minimum wage did not afford a normal living. Despite our work, many things in the analysis may be improved such as taking in count other potential consequences like unemployment , poverty, etc not only on a competitive market.

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6 References
Brown, W. (2007) The Process of Fixing the British National Minimum Wage, 1997-2007, British Journal of Industrial Relations, vol. 47, n.2, 429-443. Marone, H. (2009). Some Effects of the Financial Crisis on the Developing World. Office of Development Studies United Nations Development Program, New York. Council of Ministers (2012): Decision for Defining the minimum wage, in the whole country.URL: http://www.keshilliministrave.al/index.php?fq=brenda&m=news&lid=11022 . accessed:15.05.2012 Economics help (2012). URL:http://www.economicshelp.org/labour_markets/wagedetermination.html accessed: 20.05.2012 ILO and the Council of Europe (2004): Employment Policy Review Albania,pp.24-28 INSTAT (2012). URL:http://www.instat.gov.al/graphics/doc/tabelaticknew/ickmaj2012/ta2.xls. accessed: 25.05.2012 INSTAT (2012): Minimum wage. http://www.instat.gov.al/graphics/doc/tabela/treguesit sociale/paga/pag 2012/ta2.xls. accessed: 29.05.2012 UNICEF (2000): ASSESSMENT OF SOCIAL & ECONOMIC CONDITIONS OF DISTRICTS IN ALBANIA, p. 26 FedEE (2012) : http://www.fedee.com/pay-job-evaluation/minimum-wage-rates/ 29.05.2012 Investopedia (2012): minimum wage URL: http://www.investopedia.com/terms/m/minimum_wage.asp#axzz1yL9ByuGE accessed: 25.05.2012 URL:http://www.ek-sk.com/njoftime/87-paga- minimale-ne-shkalle- vendi-2011.html accessed: 25.05.2012 accessed:

Arango, C. and A. Pachon (2003). Distributive Effects of Minimum Wages on Household Incomes.Washington, DC: World Bank, memo. 13

Fields, G. and R. Kanbur (2006). Minimum Wages, Poverty and Income Sharing. Cornell University.

Wikipedia (2012): Minimum wage. URL:http://en.wikipedia.org/wiki/minimum_wage, accessed:10.05.2012

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