The Main Macroeconomic Drivers of the Minimum Wage: Evidence from European Countries

Purpose: This study investigates the long-run effects of unemployment, the consumer price index, the level of gross domestic product, and labor productivity on minimum wages in a sample of 23 European countries over the period 1999–2024. Method: The Cross-Sectionally Augmented Distributed Lag (CS-DL) approach is employed as the baseline estimator to examine the long-run impacts of macroeconomic variables on minimum wages. To assess the robustness of the findings, the Cross-Sectionally Augmented Autoregressive Distributed Lag (CS-ARDL), Cross-Sectionally Augmented Error Correction Model (CS-ECM), and Common Correlated Effects Mean Group (CCEMG) estimators are additionally applied. Finally, causal relationships among the variables are investigated using the Dumitrescu–Hurlin (DH) panel causality test. Results: The CS-DL results indicate that the consumer price index exerts a positive and statistically significant effect on minimum wages in the long run. The causality analysis reveals bidirectional causal relationships between the consumer price index and minimum wages, as well as between the level of gross domestic product and minimum wages. In addition, a unidirectional causal relationship is identified running from unemployment to minimum wages and from minimum wages to labor productivity. Contribution: This study contributes to the existing literature by providing a comprehensive analysis of the minimum wage determination mechanism in terms of both the set of explanatory variables and the econometric procedures employed. Furthermore, it offers empirical evidence on the macroeconomic dynamics shaping minimum wage decisions, moving beyond intuition-based arguments and descriptive assessments.