Effects of increasing the minimum wage on the government budget

At the start of 2019, the Dutch Socialist Party (SP) submitted an initiative note to the House of Representatives with the proposal to increase the statutory minimum wage by 10 percent. The SP has asked SEOR to investigate the budgetary consequences of a step-by-step increase in the minimum wage.

The consequences for the government budget have been calculated for four variants, in which the increase takes place in steps of 2,5 percent, 3,5 percent, 5 percent and 6 percent per year over a period of four years. The following effects are included in the calculation:

1. Extra expenditures on benefits linked to the minimum wage;
2. Extra expenditures on personnel employed by the government and semi-government;
3. Extra income via payroll tax and premiums.

The research shows that the income effects through payroll tax and premiums amount to approximately 35 percent of the extra expenses on benefits and personnel. When the minimum wage is increased by 2,5 percent per year (over 10 percent in four years), the income effects amount to approximately 1,5 billion euros. The existing literature is not very clear about other possible effects of an increase in the minimum wage, such as the consequences on employment or the labor supply. Therefore, these effects were not included in the calculation.