The Quest for an Optimal Minimum Wage

Labor Market Power and the Quest for an Optimal Minimum Wage: Evidence from Italy | High Public Debt in an Uncertain World: Post-Covid-19 Dangers for Public Finance | Fiscal Rules Post-Covid: Using the Recovery Phase to Reduce Debt Ratios | 60%, –4% And 6%, a Tale of Thresholds for EU Fiscal and Current Account Developments
Videos Now Online | EconPol Annual Conference, 13-14 October
The effect of minimum wages on employment and poverty is a contested topic among economists. While national minimum wages in Luxembourg, France and Germany are on the high side within Europe, Italy is one of a few European countries that do not have a statutory minimum wage. Recently, the proposal to introduce a minimum wage has been relaunched within the Italian parliament. This study by Mauro Caselli, Jasmine Mondolo, and Stefano Schiavo assesses the positive and negative impact of a potential minimum wage on the Italian economy. The authors determine an optimal value of a minimum wage to range between 8.25 and 9.65 EUR an hour. This value would reduce the market power of high-productivity firms who pay low wages and – contrary to the value currently being discussed in the Italian parliament – also minimize the share of firms that may suffer damage.
During the Covid-19 crisis, governments have had little choice but to support the economy while trying to keep the spread of the disease under control. This means accepting large deficits. In his EconPol Policy Brief Daniel Gros cautions countries with high debt ratios not to simply rely on low interest rates to make their (Covid-19) debt sustainable. In some countries, such as Italy or the US, public debt has increased by between 25 and 30 percentage points relative to GDP. Moreover, the levels reached by a number of countries (close to 160 percent of GDP for Italy, 130 percent of GDP for the US, 200 percent of GDP for Greece) are above the levels that would have been considered prudent a few years ago.

Watch Daniel Gros keynote speech on Dangers of High Public Debt in an Uncertain World at EconPol Europe's annual conference 2021.
It is widely assumed that the debt reduction criterion cannot and should not be enforced when the suspension of the fiscal rules motivated by the Covid crisis ends. Therefore, the Commission has recently (re)launched a review of the economic governance rules. The main reason given is that debt levels have increased and that this makes it more difficult to reach the debt reduction target, which is one twentieth of the difference between the actual and the 60% reference value. In his new EconPol Opinion Daniel Gros argues against this reasoning. The debt reduction criterion becomes easier to achieve during the post-Covid recovery phase because nominal GDP growth is higher than before the crisis, thus reducing the primary surplus required to achieve any given reduction in the debt to GDP ratio.
60%, –4% and 6%: these are numbers to remember when discussing EU fiscal and current account developments. In their new EconPol Working Paper António Alfonso and José Carlos Coelho investigate the relationship between the budget balance and the current account balance for EU countries from 1995 to 2020. They show that the impact of the budget balance on the current account balance is greater for those Eurozone countries before 2010 with an average current account balance-to-GDP ratio outside the range of –4 to 6%, and in Eurozone countries with debt-to-GDP ratios above 60%. Drawing from this result, the authors conclude that policy measures should aim to contain both, budget deficits and big current account deficits.
Videos, Papers and Presentations Now Online | EconPol Europe Annual Conference 2021
Video recordings of our Annual Conference, including keynote speeches from Olivier Blanchard, former chief economist at the IMF, and from Daniel Gros, Distinguished Fellow at the Centre for Europe-an Policy Studies, as well as from our panel debate on Fiscal Policy for the Post-Covid Era - US vs. EU with Clemens Fuest, Debora Revoltella, Claudia Sahm, and Maarten Verwey are now available to view on our website (jump to section 'Conference Resources'). You can also see and download all the available papers and presentations from our guests.

We hope you enjoyed the program, and look forward to welcoming you back next year. Please do get in touch if you have any comments or feedback on the content or format of the conference.

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Published: ifo Institute for Economic Research at the University of Munich,
Editor: Susanne Richter.

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