Extravagant minimum wage increase and its consequences

COLOMBIA - In Brief 30 Dec 2025 by Andrés Escobar Arango
President Petro just announced a 23% increase in the minimum wage (MW) for 2026, setting it at COP $2 million including the compulsory transportation allowance. When all the non-wage costs are taken into account, the gross cost of an employee earning one minimum wage will be around COP 2.8 million in 2026 (close to USD 750) for any business. This translates into roughly an 18% real increase in the minimum wage (19% if the comparison is made against expected inflation, as it should be). Colombia had never witnessed such a steep increase, the highest ones being around 5-6% real hikes. It is obvious that this is an electoral strategy geared toward garnishing larger electoral masses for the upcoming congressional and presidential elections. Here, however, we will touch upon only on the most important economic effects of this measure. First and most obvious, there will be, with zero doubt, an important increase in labor informality and probably unemployment. Unfortunately, in Colombia social security is tied to the minimum wage (nobody can contribute based on wages below the minimum wage), which by definition means that a such a sharp increase would move people out of formality and would make it harder for those already informal to get into the contributory social security regime. Suffices to say that with this increase the minimum wage is close to 100% of GDP per capita and larger than the economy's average wage (and close to 90% of the average wage of those belonging to the "formal" labor market). This measure makes short than impossible for the young and blue-collar workers in small towns to enter the formal labor market. Secondly and less obvious, the fiscal outcomes ar...

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