The recent announcement by President Gustavo Petro regarding the 2025 minimum wage increase in Colombia, with a 9.54% hike, has sparked intense debates in economic and labor circles. While the measure aims to improve workers’ quality of life, especially amidst high inflation, its implications extend far beyond the immediate perception of its beneficiaries.
Although the minimum wage is designed as a tool to protect workers, it often ends up harming those it seeks to help the most. In economies like Colombia’s, where approximately 55.6% of workers operate in informal markets, a substantial minimum wage increase may exclude more people from formal employment. Small businesses, facing higher labor costs, are forced to reduce hiring, resort to informality, or even cease operations.
For instance, a significant minimum wage increase in South Africa in 2019 led to a contraction in formal employment, particularly in labor-intensive sectors such as agriculture and manufacturing. This phenomenon not only limits job opportunities but also exacerbates inequalities in the labor market.
The Inflationary Effect and the Cost of Welfare
The inflationary impact is another critical aspect. As labor costs rise, businesses pass those costs on to consumers in the form of higher prices, reducing purchasing power even for those not earning the minimum wage. In Colombia, experts like Carolina Soto, former co-director of the Central Bank, have already warned that this increase could prolong high interest rates and hinder inflation reduction, exacerbating the cost of living for most Colombians.
A historical example is Venezuela, where drastic and frequent minimum wage increases, unaccompanied by corresponding productivity gains, contributed to hyperinflation that devastated the economy and further impoverished citizens.
Without Minimum Wage: The Case of Denmark
Some economies have opted not to establish a legal minimum wage, relying on alternative mechanisms to regulate the labor market. Denmark, for instance, lacks a legislated minimum wage. Instead, wages are negotiated through collective agreements between employers and unions, resulting in competitive pay and favorable working conditions.
This model allows wages to adjust flexibly according to workers’ skills and productivity, promoting significant economic efficiency. Moreover, Denmark’s long-term unemployment rate is currently around 0.9%, reflecting one of the lowest unemployment levels in Europe and a high quality of life—indicators that support the success of this approach.
However, the absence of a legal minimum wage requires a robust institutional framework and strong unions to effectively represent workers’ interests. This demonstrates that this model is not a universal solution but an opportunity to structure more efficient labor markets aligned with the principles of economic freedom.
While some argue that the minimum wage is necessary to ensure a decent standard of living, others view its implementation as an obstacle to economic growth and job creation. The real solution may lie in a middle ground: policies that strengthen productivity, reduce informality, and encourage individual negotiations between employers and employees.
An innovative example could be the implementation of sector-specific “negotiated wages,” where each industry sets minimum wages based on its unique conditions. This practice, used in countries like Germany, balances worker protection with the flexibility needed to maintain business competitiveness.
The Role of Productivity
The relationship between minimum wage and labor productivity is complex and varies across economic contexts. In economies without a legal minimum wage, such as Denmark, wages often reflect workers’ productivity more directly. This approach incentivizes employers to hire efficiently and workers to develop skills that increase their market value.
Conversely, in systems with high minimum wages, businesses may struggle to retain less productive employees, particularly in low-skill sectors, potentially leading to higher structural unemployment. However, a moderate minimum wage can also incentivize workers to achieve higher productivity levels to justify their employment.
This contrast suggests that productivity is inherently tied to labor market design. The existence or absence of a minimum wage should be evaluated by considering its impact on innovation, human capital investment, and overall economic efficiency.
Toward a Sustainable Future
Colombia’s minimum wage increase, although well-intentioned, offers a limited solution to deep structural issues such as informality, low productivity, and inequality. The country needs an open discussion about alternatives that respect economic freedom and promote general welfare, avoiding the adverse consequences that have historically accompanied poorly planned wage hikes.
Colombia can learn from international experiences and adopt innovative solutions that enable workers to thrive in a dynamic, competitive, and less regulated market. Only then can the nation build a sustainable path toward true prosperity.
Omar Camilo Hernández Mercado is a law student at the Universidad Libre de Colombia, Senior coordinator of Students for Liberty in Colombia, and a seminarist in “The Austrian School of Economics” at the International Bases Foundation.
