Minimum wages, maximum impact? Unpacking inflation trends in the EU

In the last few years, global inflation has reached levels not seen in years. According to World Bank data, the annual inflation rate in 2021 was 3.5% and rose to 8% in 2022 – the most significant surge since 2008. According to Eurostat data, annual HICP inflation in the European Union rose from 2% in 2003 to 6.4% in 2023. High and persistent inflation was one of the most significant issues for central banks and other policymakers. That creates a need for a deeper analysis of the factors that shape inflation processes.

Low and stable inflation is essential. It enables efficient resource allocation in the economy and supports sound, rational economic decision-making. It reduces uncertainty about future price formation – households and businesses do not expect large changes in the price level if inflation is stable. Low, positive, and stable inflation performs the following functions: it acts as a buffer against deflation, reduces the risk of unemployment, reduces distortions in economic behaviour, and prevents a loss of the value of money. It also helps maintain financial stability (Gerdesmeier, 2008).

Several factors that cause inflation have been identified in the literature. Demand-pull inflation occurs when total demand for goods and services exceeds supply. The excess demand puts upward pressure on prices and leads to higher inflation. There may be several reasons for the rise in aggregate demand, including higher spending driven by rising wages. Cost-push inflation occurs when the total supply of goods and services falls. It may be caused, e.g. by an increase in production costs. There is an upward pressure on prices and inflation if aggregate supply falls and aggregate demand remains unchanged.

On the other hand, inflation expectations have an important influence on inflation outcomes. There is a risk that expectations can become self-fulfilling: for example, if workers expect inflation to rise, they may demand higher wages to offset price increases, thereby raising business costs (Bobeica et al., 2019). Additionally, institutional factors related to the rigidity of labour and product markets play an important role in shaping the inflation rate (e.g. minimum wage legislation or trade unions' behaviour). One of the institutional factors is the minimum wage, which is the focus of this study.

This study examines the impact of minimum wage changes on inflation, aiming to determine whether growth in the minimum wage contributes to a rise in the overall inflation rate. The theoretical literature confirms the existence of a long-term equilibrium relationship between minimum wages and inflation (Jayasooriya, 2009) and highlights several channels through which minimum wage adjustments may influence inflationary dynamics (see, e.g. Majchrowska, 2022).

First, an increase in the minimum wage raises firms' production costs. In response, firms may seek to maintain profit margins by passing these additional costs on to consumers through price increases –a strategy often perceived as less detrimental than workforce reductions. Second, minimum wage hikes may generate spillover effects, with wages for higher-earning workers also rising. This broader wage growth can further elevate firms' labour costs, thereby reinforcing inflationary pressures. As inflation and costs of living increase, citizens may demand higher wages to compensate for rising prices. The OECD (2022) points to the risk of a wage-price spiral that could result from indexation of the minimum wage to inflation. In countries where all wages are indexed to inflation, the risk of a wage-price spiral rises.

Third, increasing the minimum wage raises household disposable income, boosting demand for goods and services and potentially driving up prices. Fourth, as the minimum wage rises, the creditworthiness of the lowest-paid workers increases, enabling demand to rise even further. Fifth, various labour market institutions—such as severance payments in the case of mass layoffs—are often indexed to the minimum wage level. As a result, increases in the minimum wage can raise employer costs through these additional channels. Collectively, these mechanisms support the theoretical expectation of a positive relationship between minimum wage growth and inflation.

Conversely, if wages for non-minimum-wage workers do not increase proportionately, the inflationary effects of a minimum-wage hike can reduce their real incomes, thereby weakening aggregate demand. This decline in demand may offset initial price pressures, potentially exerting a disinflationary effect. Thus, a negative relationship between minimum wage growth and inflation is possible. Although the increase in nominal wages for low-income earners is evident, the overall impact on real wages and broader economic welfare remains ambiguous (see also Majchrowska and Roszkowska, 2025).

The above considerations show that the overall effect of minimum wage growth on inflation cannot be easily predicted. This is because businesses may respond differently to an increase in the minimum wage, which largely determines how the economy will be affected. In response to a minimum-wage increase, employers do not have to raise prices – if they do not, their margins and profits fall (Lemos, 2004). If they do not accept the loss of profit, they can reduce employment by laying off workers (Harasztosi and Lindner, 2019) or cutting non-wage benefits, such as employer-paid insurance (Clemens et al., 2018). However, as MaCurdy (2015) and Harasztosi and Lindner (2019) demonstrate, higher labour costs are often passed on to consumers through price increases, as this channel is the least expensive for companies. In our study, we account for the possible positive and negative impacts of the minimum wage increase on prices by introducing two minimum wage variables into the model.

The examination of the relationship between minimum wage growth and inflation is particularly relevant to European Union (EU) member states. As of 2024, 22 out of the 27 EU countries have implemented a statutory national minimum wage. This issue has gained additional significance in light of Directive (EU) 2022/2041 of the European Parliament and of the Council on adequate minimum wages in the European Union, which has already been implemented across EU Member States. The directive establishes a framework comprising specific criteria for setting and regularly adjusting minimum wages. These criteria aim to ensure the adequacy of minimum remuneration with a view to securing a decent standard of living, reducing in-work poverty, strengthening social cohesion, promoting upward social and economic convergence, and narrowing the gender pay gap ^[1].

The directive advocates establishing minimum wages at a level that ensures adequacy and proposes anchoring these wages to reference values, such as the average or median wage, to support fairness and transparency in wage-setting mechanisms. This increases the potential for further minimum wage growth. According to the Eurofound (2004) Annual Review, the median nominal increase in the minimum wage across Member States was almost 10% (compared to above 11% in 2023). Between 2003 and 2023, nominal minimum wages in all EU countries that apply them increased strongly (from 45% in France to 780% in Romania). On the other hand, the cumulative increase in the price level in the EU was 63% (from 40% in Ireland to 207% in Romania). High inflation combined with rising minimum wages makes the question of the minimum wage's impact on prices increasingly relevant. The minimum wage increases observed in many European economies over the last few years highlight the importance of this topic.

However, the number of studies examining the relationship between minimum wage increases and inflation in EU countries is relatively small. Most studies focus on the US economy or developing countries. This study aims to partially address this research gap. We aim to verify whether changes in minimum wage constituted an important factor affecting the inflation rate. The minimum wage pass-through effects on the inflation rate in 21^[2] European Union countries with national minimum wage legislation are analysed using publicly available Eurostat data.

The research period covers 2003–2022. The lower bond is adjusted to the inflation rate. We wanted to consider all EU countries with a national minimum wage, but at the beginning of the 2000s, the inflation rate was still very high in some of the New Member States. Since 2003, the inflation rate across all EU member states has remained below 20%. This threshold reflects limitations in the availability of consistent statistical data.

In our model, we consider both positive and negative effects of minimum wage growth by introducing two variables. The first variable – the growth rate of minimum wages reflects the growth of production costs, and according to the theoretical background, we expect positive effects on the inflation rate. The second variable – the minimum-to-average wage ratio reflects the degree of binding and a potential decline in relative income by other workers and, according to theory, should lead to negative inflationary pressure.

We analyse the potential impact of changes in the minimum wage on inflation, not only on the overall inflation rate (HICP), but also on the food inflation rate and the inflation rate in the services sector. We verify whether the effects of minimum wage growth differ within the sample of 21 EU countries – between old and new member states and between countries with low and high minimum-to-average wage ratios. Lastly, we checked the stability of the minimum wage effects over the business cycle.

To assess the impact of minimum wage increases on inflation, this study adopts the New Keynesian Minimum Wage-Augmented Phillips Curve framework. Specifically, it integrates the minimum wage-augmented Phillips curve developed for aggregate U.S. data (Glover, 2018) with the regional Phillips curve approach applied to U.S. regions (Bishop and Greenland, 2021; Hazell et al., 2022). The empirical analysis is conducted using a panel data methodology, employing the Panel-Corrected Standard Errors (PCSE) estimator to account for heteroskedasticity and contemporaneous correlation across units. Several robustness checks are performed – we analysed different model specifications, variable selection, and lag structures. To the best of our knowledge, this is the first study to apply this combined approach to a panel of European Union countries.

The literature on the impact of the minimum wage on employment and unemployment rates is enormous. Meta-analyses by Neumark and Shirley (2021), Wolfson and Belman (2019) for the US, Campolieti (2020) for Canada, Martinez and Martinez (2021), and Dube (2019) for other countries confirm relatively low negative effects on young and the least experienced workers. The partial lack of consensus and the small employment effects prompted researchers to analyse other channels through which adjustments may occur following the minimum wage increase. One of these is the price channel.

Initial studies showed a small and positive impact of minimum wage increases on the prices of goods and services. Lemos (2008) analysed nearly 30 studies on this topic and concluded that, depending on the methodology used, a 10% increase in the minimum wage results in an overall price increase of no more than 0.4% (and up to 4% in food prices). The main message of this study is that the minimum wage raises wages for the poorest without excessive reductions in employment or price increases. This means that policymakers can apply the minimum wage without destroying too many jobs or causing excessive inflation. Although the topic is increasingly discussed, few comprehensive studies examine the relationship between the minimum wage and the price level.

Most recent studies also show that an increase in the minimum wage leads to a statistically significant increase in inflation (see, e.g. Leung, 2021 or Harasztosi and Lindner, 2019). However, some studies indicate that increasing the minimum wage does not increase inflation (Campos-Vazquez and Esquivel, 2020; MacDonald and Nilsson, 2016).

Harasztosi and Lindner (2019) underline that the costs of the minimum wage increases are borne mainly by consumers. Research on Hungary shows that companies hiring minimum wage workers responded to the increase in labour costs by raising prices and total revenues. Labour was replaced by capital, and corporate profits fell slightly.

The conclusion that companies prefer to raise prices rather than lay off workers was also reached by Majchrowska (2022), who analysed the impact of the minimum wage on inflation in Poland. Moreover, she showed that this impact is greater for food price inflation and more significant in periods of high inflation than in periods of low inflation (similar to Lemos, 2004). Inflationary pressures are also higher in regions of Poland with strong labour markets and relatively high wages. Similar heterogeneity in the price response to a minimum-wage increase was observed by Leung (2021). Studying grocery store prices in poor regions (where the minimum wage is more binding), found that the predicted price elasticity is higher there than in rich regions.

Zou et al. (2023) estimated the overall impact of the minimum wage on consumer goods prices from a retail perspective in China. An increase in the minimum wage significantly raises the retail prices of consumer goods, with the greatest impact on food, footwear, clothing, and textiles. However, the minimum wage has only a small impact on the cost of durable goods. Despite this, net welfare remains positive after accounting for the increase in consumer spending. It has been shown that a 10% increase in the minimum wage increases households' overall cost of living by 2.47–6.76%. Cooper et al. (2017) found that prices and consumption increased following changes in the minimum wage, particularly in the food and service sectors. Due to rising minimum wages, households increase spending on food consumed at home and out of the home and reduce debt. Dettling and Hsu (2021) showed that a higher minimum wage reduces borrowing costs and positively impacts disposable income and liquidity. Additionally, Yamagishi (2021) estimated that a 10% increase in minimum wage rates induces a 2.5–4.5% increase in housing rent and is equivalent to receiving lump-sum transfers of 0.75–1.35% of total earnings.

These findings from the literature confirm that an increase in the minimum wage has a positive impact on inflation. Differences in the scale of the impact of individual surveys may be due to several factors, including the price elasticity of demand for a given good or service (as Harasztosi and Lindner (2019) pointed out, in industries where it is difficult to raise prices firms prefer to reduce employment), the level of inflation in the economy, and the degree of competition (in competitive industries it is more difficult to pass on cost increases to product prices). Competition plays a key role in the mechanism by which the costs associated with minimum wage increases are passed on to prices. High competition limits firms' ability to raise prices, forcing them to optimise costs or accept lower margins, potentially dampening inflationary effects. In sectors with less competition, however, firms have greater freedom to pass costs on to consumers, which may amplify inflationary pressures following wage hikes (see Ritz, 2024, or Menezes and Quiggin, 2022).

The effects of minimum wage increases depend also of the structure of employment (in industries employing mainly low-paid workers, the impact of the minimum wage on prices may be greater), the distinction between the short and long term (in the long term, wage increases may be offset by productivity growth), the phase of the business cycle (in an environment of economic growth and low unemployment, companies may be more willing to raise prices than lay off workers).

The effects of an increase in the minimum wage may depend on the state of the economy and the central bank's response to rising inflation (Glover, 2018). As indicated, a rise in the minimum wage may tighten the economy if monetary policy responds strongly to higher inflation. However, if the economy is in a demand-driven recession and at the zero lower bound, raising the minimum wage increases inflation but does not trigger a central bank response – it has an expansionary effect on the economy. Also, Glover and Mustre-del-Rio (2021) showed that the impact of the minimum wage on the economy depends on the central bank's tolerance of deviations from the inflation target. Their analysis shows that the minimum wage's impact on inflation is larger when the central bank is less willing to respond to current inflation, keeping monetary policy unchanged and thereby not affecting inflation through the available channels. These findings are confirmed by Šauer (2018), who states that if the Federal Reserve conducted a highly dovish monetary policy, the federal minimum wage would substantially affect the macroeconomy.

What is worth emphasising is that the increase in the national minimum wage and the accompanying rise in the prices of goods and services produced by companies also have significant consequences for the economy's competitiveness on the international stage. Higher inflation resulting from minimum wage increases can reduce export competitiveness by raising the cost of domestically produced goods. For example, recent studies from China show that minimum wage regulations negatively affected export performance in the forest products industry, as firms faced higher labour costs and reduced competitiveness in international markets (Guan et al., 2026). Additionally, higher minimum wages, which raise incomes and domestic prices, may increase imports. Hammami et al. (2026) show that rising minimum wages in the U.S. industry led to higher labour costs, making domestic goods less competitive with imports.

An important problem discussed in the literature is the impact of the minimum wage on workers' living standards (ILO, 2023). If the minimum wage is not adjusted for inflation, or if the inflation rate rises faster than the minimum wage, the real value of wages falls. Moreover, even if the minimum wage is adjusted for inflation, the increase in the cost of living for low-income households may not be fully compensated (OECD, 2022). Harasztosi and Lindner (2019) point to uneven effects of minimum wage increases on income redistribution (e.g. in cities where the rich consumers use the services of low-paid workers, income is redistributed from the rich to the poor). The need to adjust the minimum wage to the economic situation was also raised by Vlad (2023), who pointed out that in Romania, between 1999 and 2021, increases in the minimum wage failed to keep pace with rising inflation, and this led to lower living standards and a decline in the purchasing power of the poorest. MaCurdy (2015), however, showed that using the minimum wage as an instrument to reduce poverty is counter-effective because price increases caused by wage increases are felt most by people experiencing poverty. Thus, the cited literature indicates that an increase in the minimum wage and the accompanying price increase may translate into a decline in real wages, a decline in aggregate demand and negative rather than positive effects on the rate of growth of prices of goods and services in the economy.

In summary, the literature indicates possible positive and negative inflationary effects resulting from an increase in the minimum wage. Most research on the relationship between minimum wage growth and inflation focuses on individual prices from a retail perspective, often at the country or sector level. In this paper, we analyse this relationship from a broader perspective. In the proposed model, we allow for a positive impact on prices from increased production costs, as well as a negative impact from price increases and a decrease in consumer purchasing power.

We analyse the effects of minimum wage increases on overall price increases (HICP), as well as on food inflation and the services inflation rate. According to our first hypothesis, the effects of minimum wage growth on the overall inflation rate will be significant but relatively small; we expect more substantial positive effects on the food and services inflation rates. The price elasticity of demand for food is low; additionally, both food and services are labour-intensive sectors. Moreover, an increase in production costs will translate to higher product prices in those sectors with lower international competition.

Next, we examine whether the effects of the minimum wage differ across the 21 EU countries in our sample. First, we divided the sample into old and new member states. According to our second hypothesis, the increase in production costs will affect the inflation rate more in OLD member states with more stable labour markets and a higher share of services.

Thirdly, we checked whether the effects differ in countries with low and high minimum-to-average wage ratios. In countries with a relatively low share of minimum-wage workers (low minimum-to-average wage ratios), it is easier for firms to pass higher production costs through to higher product prices. According to our third hypothesis, the minimum wage growth pass-through effects should be more potent in countries with a low minimum-to-average wage ratio than in countries with a high minimum-to-average wage ratio.

Lastly, we checked the stability of the minimum wage effects over time. The literature suggests that companies may be more willing to raise prices than to lay off workers during periods of relatively high economic growth and low unemployment. According to our fourth hypothesis, the effects of minimum wage growth on inflation will be stronger in times of higher economic growth.

In 2022, 21 out of the 27 European Union countries had a national minimum wage. In 2023, the national minimum wage was implemented in Cyprus. Only five EU member countries lack national minimum wage legislation (Denmark, Italy, Austria, Finland and Sweden).

Monthly minimum wages vary widely across the EU countries; in 2022, they ranged from 348 euros in Bulgaria to 2,285 euros in Luxembourg. The highest minimum wage level is observed in most developed EU countries (Luxembourg, Ireland, Belgium, the Netherlands, Germany and France). The lowest in the least-developed EU countries (Bulgaria, Latvia, Romania, and Hungary).

The minimum-to-average wage ratio varies from 40% in Bulgaria to 59% in Slovenia (see Figure 1). In most countries, the ratio increased during the analysed period.

We apply the Minimum Wage-Augmented Phillips Curve framework to analyse the effects of minimum wage increases on inflation, following the approach of Glover (2018). This framework is further contextualised using insights from regional Phillips curve heterogeneity, as discussed in Bishop and Greenland (2021). Specifically, we estimate the parameters of the New Keynesian Minimum Wage-Augmented Phillips Curve for a panel of 21 European Union countries over the period 2003–2022 (see also Majchrowska and Roszkowska, 2025):

where:

• $πi,t$ (⁠$πi,t−1)$– is the inflation rate in country i at time t (at time t-1);

• $MWGi,t$ – is the minimum wage growth rate in country i at time t;

• $GDPGi,t−1$ – is the gross domestic product growth rate in country i at time t-1;

• $URi,t$–– is the unemplyment rate;

• $Xk,i,t$ – vector of other variables.

The dependent variable in our model is the inflation rate, measured using the Harmonised Index of Consumer Prices (HICP) as reported by Eurostat. To capture potential heterogeneity in the response of different price categories to minimum wage changes, we estimate separate specifications for:

1. Overall inflation (HICP_total),

2. Food inflation (HICP_food),

3. Services inflation (HICP_services).

This disaggregated approach allows us to assess whether the transmission of minimum wage increases to prices differs across sectors with varying labour intensity and wage pass-through sensitivity.

In equation (1), we use the lagged inflation rate, which is frequently adopted as a proxy for backwards-looking expectations within hybrid Phillips curve specifications, on the grounds of adaptive or inertial expectation formation and the presence of informational rigidities (see Gali et al., 2005; Rudd and Whelan, 2005; Us and Ozcan, 2005).

Our model incorporates both demand-side and cost-side determinants consistent with established economic theory. To capture demand-side influences, we use two indicators: the unemployment rate (URATE) and the GDP growth rate (GDPG) ^[3] lagged by one year. The GDP growth rate reflects shifts in the business cycle, while the unemployment rate indicates labour market pressures. Both variables are sourced from Eurostat.

To approximate cost-push pressures on inflation, we include the lagged annual growth rate of oil prices (LGBRENT) as a control variable. This captures the delayed pass-through of global energy price shocks to domestic inflation. The oil price data are sourced from Statista and refer to the Brent crude oil benchmark.

In addition, we incorporate time fixed effects to control for common shocks and macroeconomic trends—such as monetary policy changes, global financial conditions, or EU-wide policy measures—that may simultaneously affect all countries in the panel and influence inflation dynamics. The PCSE estimator additionally accounts for panel heterogeneity by allowing for heteroskedastic and contemporaneously correlated error structures across countries. We also estimated specifications including country fixed effects to control for unobserved time-invariant heterogeneity across EU member states, such as institutional differences, labour market structures, and wage-setting regimes. The inclusion of country fixed effects does not alter the study's main conclusions, confirming the robustness of the estimated relationships.

Our primary focus lies on the minimum wage-related variables, which are central to the inflationary dynamics explored in our model. The growth rate of the minimum wage in national currency (GMW) is used to capture the cost-side pressure that may contribute to producer price increases. A positive and statistically significant coefficient on this variable would indicate that rising labour costs—driven by minimum wage adjustments—are being passed through to consumer prices, resulting in higher inflation. Since inflation measures price dynamics rather than price levels, the growth rate of the minimum wage is intended to capture the contemporaneous cost-push shock associated with statutory wage adjustments. To account for cross-country differences in wage structures, we also include the minimum-to-average wage ratio (MW_AW). This variable reflects the relative position of low-wage earners in the overall wage distribution. An increase in this ratio suggests that wages of lower-skilled or less-educated workers are growing faster than those of more-skilled workers. Our working hypothesis is that minimum wage growth may be less inflationary when the ratio is low, as firms have greater flexibility to absorb wage increases. In contrast, a high MW_AW ratio may signal reduced flexibility and potential distortions in the wage structure, potentially leading to weaker price-setting power and even downward pressure on inflation. Descriptive statistics for all variables used in the model are presented in Table A1 in the Online Appendix.

Inflation data, along with a range of explanatory variables, are used to estimate the parameters of equation (1) through panel estimation techniques—specifically, panel-corrected standard errors (PCSE) and feasible generalised least squares (FGLS), following approaches similar to those in Rahman et al. (2019) and Darcillon (2015). These models account for heteroscedasticity by allowing cross-country variation in the error-term variance. To mitigate potential endogeneity concerns, the explanatory variables are lagged by one period, consistent with the strategy used by Ha et al. (2022). The FGLS method also serves as a robustness check to address issues related to heteroscedasticity and fixed effects. Given that we allow for autocorrelation within panels, a first-order autocorrelation process is incorporated into the model.

Additionally, because we expect the impact of the minimum wage (both its dynamics and its relation to the average wage) to differ between old and new EU countries, as well as between countries with relatively low and high minimum wages, we have also conducted subgroup estimates. The old EU includes Belgium, France, Germany, Greece, Ireland, Luxembourg, the Netherlands, Portugal, and Spain; the new EU includes Bulgaria, Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, and Slovenia. The low ratio of minimum-to-average wages group consists of Bulgaria, Czechia, Estonia, Germany, Hungary, Latvia, Lithuania, Malta, the Netherlands, and Slovakia. In contrast, the high minimum-to-average wages group includes Belgium, Croatia, France, Greece, Ireland, Luxembourg, Poland, Portugal, Romania, Slovenia and Spain.

All data used in the analysis are publicly available from Eurostat, AMECO, OECD, and Statista databases. The empirical analysis was conducted using Stata 19. Detailed model specifications and robustness checks are reported in the manuscript and the Online Appendix.

We start the analyses with the full sample of 21 countries from 2003–2022, using the overall inflation rate as the dependent variable (see Figure 1; complete results across different methods and subsamples are presented in the Online Appendix, Tables A2-A4). The explanatory variables are statistically significant. Both demand and supply factors play important roles in shaping the overall inflation rate in EU countries. Higher GDP growth, a good labour market (lower unemployment), and higher oil prices translate into higher inflation. The results are in line with economic theory.

The parameter for the minimum wage growth rate is significant and positive. It indicates that a 1 p.p. increase in the minimum wage growth rate leads to a 0.075 p.p. higher inflation rate (Figure 2). The sign of the effect partially confirms our first hypothesis that at least part of the higher production costs are being passed on to customers. Additionally, the parameter for the minimum-to-average wage is significant and negative. It indicates that a 1 p.p. increase in the ratio leads to a −0.051 p.p. decrease in the inflation rate, which may indicate that a relative decline in other workers' wages reduces overall demand and eases inflationary pressures.

The results show that minimum wage growth impacts inflation in new member countries; the parameter for minimum wage growth equals 0.068. The relationship is not statistically significant among old member countries, which does not support our second hypothesis. Additionally, the parameter by minimum-to-average wage is significant and negative in the group of new member states. In those countries, the rapid growth of the minimum wage was not accompanied by a corresponding growth in other workers' wages, which could lower total demand and inflation pressures. Interestingly, also the growth in oil prices impacts the overall inflation rate more in new than in old member countries.

Then we verified whether the effects of minimum wage growth vary with the minimum-to-average wage ratio. The results show that the minimum wage growth pass-through effects are higher in countries with a low minimum-to-average wage ratio (0.082 vs 0.05 in countries with a high ratio). The results confirm our third hypothesis that in countries where the share of minimum-wage workers is relatively low, it is easier for firms to pass higher production costs through to higher product prices.

We examined the impact of minimum wage changes on overall and food-and-services inflation rates. The parameter for the minimum wage growth rate is significant in both cases and higher than that for the overall inflation rate (equal to 0.10 and 0.09 in the food and services inflation models, respectively; see Figures 3 and 4). It fully confirms our first hypothesis that an increase in production costs affects sectors with low demand elasticity to a greater extent and are less exposed to international competition.

Again, the minimum wage growth pass-through effects are more pronounced in new EU member countries and in countries with a low ratio of minimum to average wages. Moreover, the negative demand pressure, which is concerned with a decrease in the relative earnings of other workers, is observed in the case of food inflation and is higher than in the case of overall inflation, especially in new member countries. The demand factors are not drivers of food inflation. On the contrary, cost factors related to rising oil prices are found to be important for food inflation (see Figure 3).

Minimum wage growth positively impacts the inflation rate in services. A 1 p.p. increase in minimum wage growth leads to a 0.088 p.p. higher inflation rate in services on average. Interestingly, this parameter is significant both in old and new member countries, as well as in countries with low and high minimum-to-average wage ratios (see Figure 4).

Demand factors are drivers of inflation in the services sector. A 1 p.p. higher GDP growth rate leads to a higher inflation rate of 0.111 p.p. in the services sector on average, and this effect is more pronounced in new member countries (0.125 versus 0.059 in old member countries). The growth in oil prices affects the inflation rate, but to a lesser extent than food inflation.

In the following steps, we checked whether the minimum wage pass-through effects on the inflation rate vary over time. We divided the entire sample into sub-periods based on the business cycle's behaviour (see Figure 5).

In 2003–2008, the estimated impact of minimum wage dynamics on inflation was significant and positive. Therefore, during periods of relatively high inflation (and significant economic growth in EU countries), entrepreneurs could pass higher production costs on to higher product prices. This effect was more substantial for both food and services. Demand effects were also important during this period: an increase in demand with limited supply capacity translated into rising prices.

At the same time, it should be recalled that in most EU countries, minimum wage increases are inflation-linked (and even inflation-indexed by observed or expected inflation rates). Hence, when the inflation rate is high, it forces a strong increase in minimum wages, which in turn causes prices to rise further.

In 2009–2016, the estimated parameter with minimum wage dynamics was much weaker, and its statistical relevance declined. It seems that low inflation was associated with low growth in minimum wages and hence a weaker translation into further price growth. In a period of low inflation and weakening economic growth, there is low demand for goods and services. Under these circumstances, entrepreneurs cannot pass on increases in production costs to prices due to weaker demand.

In the 2017–2022, we observe a rise in price dynamics and (especially after the COVID pandemic) a favourable business climate, i.e. a situation in which entrepreneurs can pass on costs to prices. The estimated impact of the minimum-wage-to-average ratio is statistically nonzero for 2017–2022. We conclude that the continued growth of the minimum wage and the slower growth of other salaries have contributed to a decline in relative wages and the relative purchasing power of those in the workforce who earn more than the minimum wage. This negative impact also reflects adverse demand effects. The above conclusions confirm our fourth hypothesis that the impact of minimum wage increases on inflation is stronger in periods of relatively high economic growth and low unemployment.

The Online Appendix presents several robustness checks, including alternative estimation techniques (Online Appendix Tables A2-A5), additional lag structures (Online Appendix Tables A6-A8), a traditional NKPC specification (Online Appendix Tables A12-A14), and models that use the output gap instead of GDP growth (Online Appendix Tables A9-A11). The results obtained from these alternative specifications do not alter our main conclusions. Importantly, the coefficients on minimum wage-related variables remain stable across specifications and are qualitatively consistent in both direction and economic interpretation. The alternative lag structures are informative for understanding the dynamics of minimum wage pass-through. When the models are re-estimated with the first and second lags of the minimum wage variables included, the contemporaneous effect remains the strongest, whereas the lagged terms are either statistically insignificant or substantially smaller (reported in the Online Appendix, Tables A9-A11). This indicates that the inflationary impact of minimum wage increases is predominantly short-term, plausibly because planned changes are announced well in advance, allowing firms to adjust prices around the time the higher labour costs take effect, especially in labour-intensive sectors such as food and services. Overall, minimum wage increases appear to contribute mainly to temporary price-level adjustments rather than to long-lasting inflation dynamics, which reinforces the robustness of our main findings by showing that the estimated effects are concentrated in the short run.

This study provides empirical evidence that an increase in the minimum wage has a statistically significant and positive effect on inflation in EU countries, particularly in the food and services sector. Inflationary effects are more pronounced in the new EU member states and in countries with relatively low minimum-to-average wage ratios. In addition, the scale of these effects varies over time and depends on macroeconomic conditions, such as GDP growth, oil prices and labour market dynamics.

Given the EU directives and the estimated dependencies, institutional arrangements related to minimum wage policy should be coordinated with inflation targets. While raising the minimum wage can improve living standards and reduce income inequality, it can also contribute to inflationary pressures, especially in economies where companies can easily pass on cost increases to consumers. The increase in the prices of manufactured goods and services resulting from higher labour costs may also negatively affect the international competitiveness of EU countries. Policy makers should consider this trade-off, especially when inflation is already high.

Indexing the minimum wage to inflation should therefore be carefully designed. Automatic indexation mechanisms that protect the real incomes of low-wage workers can fuel wage-price spirals in high-inflation environments. Evidence shows that increases in the minimum wage can strengthen inflationary dynamics, particularly in less developed economies (new member countries).

Sectoral conclusions are also important. According to our analyses, the impact of the minimum wage on price dynamics is more substantial in labour-intensive sectors, such as food and services, which are less exposed to international competition and have relatively inelastic demand. This also suggests that sectoral analyses should be included in minimum wage policy considerations.

Heterogeneity in different countries requires tailored approaches. In the new EU member states, the estimated relationship between minimum wage dynamics and inflation is higher than in the sample as a whole. The institutional arrangements for the minimum wage in these countries should be supported by additional economic (particularly monetary) policy measures to mitigate inflationary risks, especially when labour markets are tight, and economic growth is robust.

The dynamics of minimum wages to average wages also affect price processes. A significant increase in relative wages can reduce the purchasing power of middle-income groups, thereby creating downward pressure on aggregate demand and moderating inflation. Therefore, the effects of wage compression should be monitored as part of a broader evaluation of wage policy.

Of critical importance is the timing and macroeconomic context. The inflationary effects of minimum wage increases are more pronounced during good economic conditions and high inflation. On the other hand, in periods of low inflation or recession, companies may have less ability to pass on higher labour costs, thereby limiting inflationary pressures.

The supplementary material for this article can be found online.