Modeling Minimum Wage Determination in Nepal: The Role of Economic Growth and Inflation

Abstract

Background: Minimum wage (MW) is among the most contested labor market instruments, particularly in countries where industrialization is not yet sufficiently matured. In setting MW, the main issue is balancing between worker’s welfare and enterprise growth, which actually difficult in developing economies with large informal sectors. In Nepal, MW has periodically revised since 1965, but whether these adjustments reflect macroeconomic conditions or balance worker welfare with industrial growth is still unclear. This study aims to prescribe a reliable statistical model that best describes minimum wage growth in Nepal. Methodology: The study combines quantitative and qualitative approaches. Quantitative component applies descrip- tive statistics and linear regression to a national data (1965–2025) of gross domestic product (GDP) growth, inflation, and MW growth. The qualitative component synthesizes literatures and policy documents to situate Nepal’s experience within global and South/East Asian regional benchmarks. Results: Between 1965–2025, mean annual GDP growth rate was 3.9%, while inflation and MW growth rates were 7.7% and 8.8%, respectively. GDP growth was positively associated with MW growth and was found significant (β = 1.16, p = .029), whereas inflation was not (p = .706), and the overall model fit was significant (p = .019). Model diagnostics indicated no problematic multicollinearity (VIF = 2.08), no evidence of heteroskedasticity (p = .357), and no evidence of model misspecification (p = .558); serial correlation was not significant (p = .053). Cumulatively, MW rose 530.4% over the period, versus 234.7% for GDP and 460.0% for inflation, indicating that wages kept up with prices, but only just. Conclusion: MW growth in Nepal has followed economic growth more than inflation, but weak enforcement and a large informal sector (60–70% of the workforce) limit its impact. Effective wage policy requires periodic, evidence-based, sector-sensitive revisions, alongside stronger enforcement, productivity investment, and broader coverage of informal and rural workers.