2025/12/30 | Andrés Pérez M., Vittorio Peretti, Carolina Monzón, Juan Robayo & Angela Gonzalez
Following failed discussions between unions and the private sector, and with general elections looming in 2026, the Government decreed a 23% increase in the nominal minimum wage (all in, including the transport subsidy) for next year, the greatest increase ever, and well above the union’s demands (16%). Importantly, the increase is substantially above BanRep’s technical staff working assumption of a roughly 6% increase, resulting from the sum of inflation (5.2%) and productivity (0.9%).
The measure takes effect on January 1, 2026, and comes on the back of several other policies that have raised the cost of labor in recent years.
However, despite higher labor costs, the labor market has tightened in the context of rising fiscal spending. The national unemployment rate (8% in October) has drifted well below NAIRU estimates (10.2%).
In this context, one-year ahead survey-based inflation expectations have increased above the 3% target, rising from 3.95% in January 2025 to 4.59% this month, eroding the 3% target’s credibility.
Our take. The announcement is an unwelcome development that will further stress macro imbalances, inflation, inflation expectations, and the fiscal accounts, warranting an appropriate monetary policy response. Additionally, labor market informality is likely to rise higher.
In our understanding, some BanRep board members claim that for every additional percentage point increase in the minimum wage above the technical estimate (inflation and productivity; 5.2% and 0.9%, respectively), total inflation rises between 6-16 bps; therefore a 23% nominal minimum wage increase would imply an additional 106 - 283 bps above the technical staff inflation forecast of 3.6% for 26YE.
Our 4.7% YE 2026 inflation forecast considered a 12% minimum wage increase, including the transport subsidy. Considering the recent developments, our inflation forecast could exceed 6%, leading us to also adjust our on-hold call for the policy rate.
A hiking cycle is inevitable, likely to begin in the next monetary policy meeting on January 30, with a hike of at least 50-bp. Prior to today’s announcement, the market-implied policy path peaked at roughly 11%, which should edge higher.