Minimum Wage Reform in a Wartime Economy : Simulating Impacts from Ukraine’s Proposed Reform

Overview & Synopsis

While the literature on the minimum wage is largely retrospective, analyzing impacts of past policy changes, this paper is uniquely forward-looking, forecasting how a proposed reform in Ukraine would affect future employment, earnings, and social contributions. The analysis simulates these effects by mimicking a proposal that would set a minimum wage floor equal to 40 percent of the previous year’s average wage once martial law is over and increasing the minimum wage by two percentage points annually until reaching 50 percent of the previous year’s average wage. The analysis draws on a 10 percent random sample of 2023 worker-level data from the Pension Fund of Ukraine, covering all jobs with pension contributions in the private sector and nonmilitary public sector. The results indicate that, under the proposal, by the end of the five-year transition period, the minimum wage would be 45 percent above the level it would have reached if adjusted only for wage inflation, which serves as the counterfactual. Projected job losses would be modest (0.51–1.03 percent), while total earnings would increase by up to 3.24 percent. The effect on social contributions and taxes would be the same as the effect on earnings since they are a fixed percentage of earnings in Ukraine. Applied to an administrative data set covering all formal sector workers, the methodology developed in the paper offers a useful tool for policy makers to anticipate the likely effects of the minimum wage reforms that are being considered. The paper concludes by discussing policy implications.