Every November, Colombia traditionally opens discussions on increasing the minimum wage, an issue that draws the attention of employers, unions, and the national government, as its outcome affects both workers’ purchasing power and labor costs in the economy.
In this debate, the reference formula considers the previous year’s inflation and labor productivity growth, seeking to preserve real income without compromising competitiveness.
However, when the minimum wage adjustment significantly exceeds the sum of these two components, significant macroeconomic risks arise: inflationary pressures, increased costs of formal employment that can lead to increases in informality, and higher fiscal costs for the State. Therefore, it is essential to strike a balance between social aspirations and economic sustainability, especially in the context of limited fiscal space. Although 2025 began with a sustained decline in inflation, recent months have not shown favorable behavior. Between June and October, the price index rose for four consecutive months, from 4.82% in June to 5.51% in October, reflecting a slight upturn in inflation. At ANIF, we project that the year will close with inflation close to 5.34%.
At the same time, labor productivity has slowed down so far this year. GDP per employed person fell by 1.2%, since the number of employed persons is growing at a faster rate than GDP, a phenomenon that had only been observed in 2022 and 2023 during the last decade (Figure 1). This behavior is partly due to the increase in the labor force during 2025 and poses the challenge of maintaining the labor market’s absorption capacity in the medium term.
Given this scenario, it is essential to estimate one of the fiscal costs that an excessive increase in the minimum wage could generate for the government. One of the main transmission channels is through the pension system, since a significant portion of pensions—particularly those corresponding to minimum pensions under the average premium system—are directly indexed to the SMLV.
Consequently, each increase in the minimum wage implies an automatic increase in the State’s obligations to pensioners under this system. It is estimated that for each additional percentage point in the increase in the minimum wage above the real wage, spending on pensions under the average premium system increases by about COP 240 billion, generating additional pressure on public finances and reducing the fiscal margin available to address other social priorities. To give an example, with projected inflation of 5.34% and labor productivity growth of 2.2%, the reference increase in the minimum wage, equivalent to 7.54%, would imply an additional fiscal cost of close to COP 500 billion in the average premium system alone. However, if the minimum wage increase reached 10%, the fiscal impact would amount to approximately COP 1.12 trillion.
The discussion on raising the minimum wage must consider not only the objective of protecting workers’ purchasing power, but also the pressures facing the Colombian economy. The current fiscal constraints limit the government’s ability to absorb significant increases in public spending, in a context where fiscal rule targets require prudence and sustainability in the state accounts. An adjustment to the minimum wage that exceeds the fundamentals of inflation and productivity could generate additional pressure on the deficit, compromise macroeconomic stability, and slow down the creation of formal employment.
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Source:
- Comentario Económico ANIF, noviembre 12 de 2025
