Minimum wage programs need to be designed on a per-country basis
- Minimum wage policies may have some positive outcomes, but can also increase inequality and negatively affect the labour market conditions of the marginalized.
- Minimum wage systems need to be adapted to take the target population to avoid creating unintended problems.
Minimum wage policies have been adopted by multiple countries since the early 1900s. They received renewed interest in the 1990s, including among developing and emerging countries, as a means to reduce working poverty and inequality1. The effects of minimum wages are determined by a complex set of factors including employment of formal sector workers, level of minimum wage enforcement, informal sector workers, and the availability of social safety nets2. Further, the nature of the minimum wage (i.e., universal, industry/occupation-specific) and the share of workers covered also influence the effects on the labour market.
Several recent research studiessupported by PEP under the PAGE initiative (co-funded by DFID and IDRC) provide insights into how minimum wage policies influence labour markets in developing countries, especially in Africa and Latin America. While supporting the findings of the previous literature, they also provide some new insights.
Men benefit more from minimum wage policies
Most of the available literature does not examine the gender differences in the effects of a minimum wage. Intending to fill this gap, PEP researchers in Bolivia find that although increases in minimum wages raise the wages of both men and women, the increase in women’s wages was much less. Furthermore, the policy also resulted in increased unemployment and informalization, which were greater for women than men. Researchers conclude that this is due to employers choosing to displace women, or reduce the quality of their employment (i.e., by reducing benefits), in the face of minimum wage hikes. PEP researchers studying the effect of a minimum wage increase in Ecuador also find that the increase in earnings due to a minimum wage increase is less for female workers, due to reduced working hours. These results are observed despite the fact that these two countries have very different minimum wage systems. Minimum wages in Bolivia are uniform across all sectors, regions and occupations and are set by the central government. In contrast, the minimum wages differ across industries and occupations in Ecuador.
The effect of minimum wages on inequality is mixed
There is general agreement in the literature that minimum wage increases result in wage compression3. PEP researchers in Ecuador find support for this result. They show that in Ecuador minimum wage hikes increase wages for workers in sectors covered by the policy relative to the wages of unaffected workers, and they lower wages for high-income workers, resulting in an income-compression. In the same study, the researchers argue that this could be due to employers trying to manage labour costs by containing the incomes of high-income workers to offset the higher cost of low-income earners. Together these effects result in lowering inequality.
However, PEP research in Kenya finds that increased minimum wages can increase rural-urban inequality. This is partly attributable to Kenya having multiple minimum wages that vary across industries and urban-rural sectors. Despite higher growth of agriculture sector minimum wages, the minimum wages in urban areas are usually higher. Many rural workers move to urban areas in search of better jobs but end up being unemployed or working low paying informal-sector jobs. PEP researchers find that minimum wages have overall increased benefits for urban households while having a negative effect on the incomes of rural households.
Minimum wages influence hours of work and informality, more than employment level; however, these effects are country-specific
PEP research in Argentina shows that the minimum wage increase did not have any significant impact on employment contrary to most international literature, which finds that an increase in minimum wages reduces formal sector employment4. Furthermore, the researchers find no substantial increase in the likelihood of workers leaving the formal sector for jobs in the informal sector. PEP researchers in Bolivia also find that minimum wage increases do not affect employment. But, unlike researchers in Argentina, they find that it does affect informality. The researchers argue this is may be due to employers reducing other benefits in order to afford the minimum wages. PEP researchers in Uruguay studying also find that the introduction of a minimum wage in the domestic sector results in increased informality.
PEP researchers studying the minimum wage effects in Ecuador find that they are noted more in the intensive margin. They find that a minimum wage increase results in a significant increase in the hours worked by non-full-time workers affected by the minimum-wage, relative to hours worked by unaffected workers. For individuals working full-time, these effects are nil. Further, they find a significant increase in the hours worked by young workers. The results also show that low-earners in sectors not affected by the minimum wage, as well as young workers, experience an increase in hours worked. The only group who significantly lowers hours of work are female workers.
The impact of minimum wage policies on poverty and inequality is mixed and varies from country to country as well as across different population groups in a country. As such minimum wage policies need to be designed carefully to minimize adverse effects on vulnerable groups.
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The impact of minimum wage raises on the Bolivian labor market
The effects of minimum wages on the labour market and income distribution in Kenya
Social protection to the informal sector in Argentina: the role of minimum wage and income transfer policies
Impact of minimum wage policies in Ecuador
Uruguay’s domestic workers boosted by minimum wage policy
External Sources
1 International Labour Organization, 2016, Minimum Wage Policy Guide, Geneva: ILO.
2-4 Gindling, T. H., 2018, Does increasing the minimum wage reduce poverty in developing countries? Bonn: IZA. 30. pp 1, 2, 3, respectively.
