The Impact of Minimum Wage Policy on Wages and Employment in Developing Countries: The Case of Indonesia

Since the late 1980s, minimum wage have become an important plank of the Indonesian government's labour policy. Minimum wages have increased faster than average wages and GDP. As a result, minimum wages have become binding for the majority of workers. This study finds that minimum wages have a positive but statistically insignificant impact on average wages. On the other hand, minimum wages have a negative and statistically significant impact on employment. In particular, the disemployment impact is greatest for women, youth, and less educated workers. However, the employment prospects of white-collar workers are enhanced by increases in minimum wages.

Minimum Wages and Employment

This paper investigates the effect of minimum wages on employment using a panel of US state-based data. We estimate a minimalist dynamic version of the specification implied by neo-classical theory. We find statistically and economically significant effects of minimum wages on youth employment. Unlike many other studies we find also significant effects on aggregate state employment. These results re-establish the conventional wisdom as existing before the work of Card-Krueger-Katz. The paper meets the methodological criticisms of this sort of panel study made by CKK. An important econometric innovation in this paper is to produce estimates allowing for cross-sectional correlation, which offers unbiased inference and potential efficiency gains.Minimum wages, panel data, cross sectional correlation, factor analysis.

The Effects of Multiple Minimum Wages Throughout the Labor Market

This paper investigates the effects of legal minimum wages on wages, employment, hours worked and monthly earnings among workers covered by minimum wage legislation as well as those for whom it does not apply (the uncovered sector) in Costa Rica. This country’s large uncovered sector and complex minimum wage policy, which has for decades set numerous wages throughout the wage distribution, provide a stimulating counterpoint to the U.S. framework for the analysis of the impact of minimum wages. We find that legal minimum wages have a significant positive effect on the wages of workers in the covered sector (with an elasticity of 0.10) but no effect on wages of workers in the uncovered sector. We also find that a 10% increase in minimum wages lowers employment in the covered sector by 1.09% and decreases the average number of hours worked of those who remain in the covered sector by about 0.6%. Finally, we show that despite the wide range of minimum wages, the largest impact on the wages and employment of covered sector workers is in the lower half of the distribution.minimum wages, employment, wages, Costa Rica

Do minimum wages in Latin America and the Caribbean matter ? Evidence from 19 countries

Despite the existence of minimum wage legislation in most Latin American countries, there is little empirical evidence demonstrating its impact on the distribution of wages. In this study the authors analyze cross-country data for 19 Latin American and Caribbean (LAC) countries to gain an understanding of if and how minimum wages affect wage distributions in LAC countries. Although there is no single minimum wage institution in the LAC region, the authors find regional trends. Minimum wages affect the wage distribution in both the formal and, especially, the informal sector, both at the minimum wage and at multiples of the minimum. The minimum does not uniformly benefit low-wage workers: in countries where the minimum wage is relatively low compared to mean wages, the minimum wage affects the more disadvantaged segments of the labor force, namely informal sector workers, women, young and older workers, and the low skilled, but in countries where the minimum wage is relatively high compared to the wage distribution, it primarily affects wages of the high skilled. This indicates that the minimum does not generally lift the wages of all, but instead, it offers a wage into which employers can"lock in"wages that are already near that level. Thus, minimum wage legislation is more far-reaching than originally thought, affecting both the uncovered informal sector and those earning above the minimum. In addition, the relative level of the minimum wage is important for determining whose wages are affected.Labor Markets,Income,Wages, Compensation&Benefits,Corporate Social Responsibility,Child Labor

Minimum Wages and Employment

This paper investigates the effect of minimum wages on employment using a panel of US state-based data. We estimate a minimalist dynamic version of the specification implied by neo-classical theory. We find statistically and economically significant effects of minimum wages on youth employment. Unlike many other studies we find also significant effects on aggregate state employment. These results re-establish the conventional wisdom as existing before the work of Card-Krueger-Katz. The paper meets the methodological criticisms of this sort of panel study made by CKK. An important econometric innovation in this paper is to produce estimates allowing for cross-sectional correlation, which offers unbiased inference and potential efficiency gains.minimum wage; panel data; cross-sectional correlation; factor analysis

State Minimum Wages: An Overview

[Excerpt] This report begins with a brief discussion of FLSA minimum wage coverage. It then provides a summary of state minimum wage laws, followed by an examination of rates and mechanisms of adjustments in states with minimum wage levels above the FLSA rate (Table 1 provides summary data). Next, the report discusses the interaction of federal and state minimum wages over time, and finally, the Appendix provides detailed information on the major components of minimum wage policies in all 50 states and DC). It is important to note that the state policies covered in this report include currently effective policies and policies enacted with an effective date on or before January 1, 2015. Several states enacted legislation in 2014 with an effective date by the beginning of 2015. As such, the description and analysis in the report reflects the effects of legislative and ballot outcomes in 2014

Does Raising the Minimum Wage Help the Poor?

What is the impact of raising the minimum wage on family incomes? Analysing the characteristics of low wage workers, I find that those who earn near-minimum wages are disproportionately female, unmarried and young, without post-school qualifications and overseas born. About one-third of near-minimum wage workers are the sole worker in their household. Due to low labour force participation rates in the poorest households, minimum wage workers are most likely to be in middle-income households. Using various plausible parameters for the effect of minimum wages on hourly wages and employment, I estimate the impact of a minimum wage rise on inequality.Minimum wages, employment, wages, earnings, income distribution

The impact of minimum wages in Mexico and Colombia

There are diverging views about how minimum wages affect labor markets in developing countries. Advocates of minimum wages hold that they redistribute resources in a welfare-enhancing way, and can thus reduce poverty, improve productivity, and foster growth. Opponents, on the other hand, contend that minimum wage interventions result in a misallocation of labor and lead to depressed wages in the very sectors - the rural and informal urban sectors - where most of the poor are found, with the effect of wasting resources and reducing the growth rate. Data from Colombia and Mexico for the 1980s provide an opportunity to evaluate the impact of minimum wages. In Mexico in the 1980s, the minimum wage fell in real terms roughly 45 percent. By 1990, Mexico's minimum wage was about 13 percent of the average unskilled manufacturing wage. During the same period, the minimum wage in Colombia increased at nearly the same rate, reaching roughly 53 percent of the average unskilled wage. The author charts how the mandated minimum wage affected the demand for skilled and unskilled labor in both countries during that decade. Findings are as follows. In Mexico, minimum wages have had virtually no effect on wages or employment in the formal sector. The main reason: the minimum wage is not an effective wage for most firms or workers. In the informal sector, in turn, there is considerable noncompliance with the mandated minimum wage, especially among part-time and female workers. As a result, significant numbers of workers are paid at or below minimum wages. In Colombia, minimum wages have a much stronger impact on wages, judging from their proximity to the average wage and both cross-section and time series estimates. The estimates imply that the elasticity of low-paid unskilled employment with respect to minimum wages is in the range of 2 to 12 percent.Wages, Compensation&Benefits,Environmental Economics&Policies,Labor Policies,Banks&Banking Reform,Municipal Financial Management,Environmental Economics&Policies,Wages, Compensation&Benefits,Child Labor,Banks&Banking Reform,Municipal Financial Management

Minimum Wage Effects in the Longer Run

Exposure to minimum wages at young ages may lead to longer-run effects. Among the possible adverse longer-run effects are decreased labor market experience and accumulation of tenure, lower current labor supply because of lower wages, and diminished training and skill acquisition. Beneficial longer-run effects could arise if minimum wages increase skill acquisition, or if short-term wage increases are long-lasting. We estimate the longer-run effects of minimum wages by using information on the minimum wage history that workers have faced since potentially entering the labor market. The evidence indicates that even as individuals reach their late 20's, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager. The adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.

Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica

The classic dual economy models of developing countries hold minimum wages (among other institutions) accountable for persistent dualism. They note that applying or enforcing minimum wage laws in only one sector of the economy will create wage differentials which will not be eroded with labor mobility to the high wage sector. In this paper we use 12 years of micro data on thousands workers living in Costa Rica to test whether legal minimum wages have a differential impact on the wages of workers in the formal sector vs. informal sector, defined in various ways in accordance with the dual development models. The evidence from Costa Rica is contrary to the assumptions of these models. We find that increases in minimum wages not only raise the wages of workers in the urban formal sector (large urban enterprises) who are covered by minimum wage law, but they also increase the wages of all other workers covered by minimum wage legislation in what are traditionally regarded as informal sectors and where the legislation is often considered not to be enforced. Specifically, we provide evidence that minimum wages increase the wages of workers in small urban enterprises, large rural enterprises and small rural enterprises. Further, our results suggest that higher legal minimum wages raise the average wage of workers in these "informal" sectors more than in the urban formal sector. We concluded that in Costa Rica minimum wages are being enforced in the rural and small scale sectors and may actually work to reduce average wage differentials between these sectors and the urban formal sector. On the other hand, minimum wages have no significant impact on the wages of workers in another sector that is regarded as informal but which is not covered by minimum wage legislation: the self-employed workers (both urban and rural). Thus, one could argue that minimum wages may contribute to dualism between the formal and informal, defined as self-employed vs. salaried workers. However, we find no evidence of the bleaker scenario, that self-employed earnings are being lowered by minimum wages.dual economy, informal sector, minimum wages, wages, Costa Rica, Latin America