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Debate on the impact of minimum wages on employment continues

Patralekha Chatterjee

Any talk of minimum wages inevitably sparks a controversy. Advocates say it helps those at the bottom of the ladder and makes for a more equitable society. Critics argue that companies are likely to hire fewer low-skilled workers if compelled to pay a higher wage, and that a hike in minimum wages pushes up unemployment. For most of the 1970s and 1980s, economists mainly believed the latter. In recent years, however, that position has been shifting.

Research supported by Canada’s International Development Research Centre (IDRC) shows that the truth may lie somewhere between the extremes. It also shows that the success of minimum wages as a social protection tool depends on many variables.

Enforcement issues

One of those variables is enforcement. In most developing countries, non-compliance with labour regulations is common. Whether minimum wages affect the job market depends a lot on the extent to which legislation is enforced. This, in turn, is a function of the local political economy. Chronic shortages of labour inspectors and corruption can further subvert the best-intentioned law.

The issues are particularly relevant as emerging and developing countries strive to achieve rapid economic growth that is socially inclusive. This has renewed interest in minimum wages policies. On one hand, there are strident calls to make labour markets more flexible. On the other, there is increased recognition of minimum wages as a tool for reducing “unfair” pay practices and raising the incomes of the poor.  “In the policy arena, the debate on minimum wages is emblematic of the broader debate on labour regulations, and regulations in general. Intellectually, the issue of minimum wages and labour regulations generally raise a whole host of very interesting and intricate theoretical and empirical analytical problems,” says Ravi Kanbur, professor of economics at Cornell University who has been part of the IDRC research project.

Results from Costa Rica

Researchers gathered at a November 2012 workshop organized by IDRC and the Institute for Human Development, a Delhi-based think tank, focused on these issues. The case studies presented looked at how minimum wage initiatives were faring in developing countries and their policy implications.
 
In Costa Rica, for example, the National Campaign for Minimum Wages (Campaña Nacional de Salarios Mínimos) has implemented a comprehensive program to increase compliance with minimum wage regulations. In August 2010, President Laura Chinchilla and Labour Minister Sandra Piszk kicked off the program with an awareness campaign targeted at employers and workers. They encouraged workers to denounce employers who pay less than the minimum wage. Among measures taken to increase reporting and reduce violations was the expansion of a call centre and an increase in labour inspections.

IDRC-supported research showed that the campaign led to an increase in compliance with minimum wage laws in Costa Rica. As a result, the mean earnings of workers earning less than the minimum wage increased by approximately 10% more than that of workers earning more than the minimum wage. The study found no evidence that the campaign had a negative impact on the employment of workers whose wages increased.
 
Benefits to workers in Argentina, South Africa

The evidence from Argentina also suggests that a minimum wage policy can effectively promote the welfare of low-skilled workers. “During the 1990s, the minimum wage was kept constant and enforcement was reduced, producing more informality but not higher employment,” said researcher Lucas Ronconi of the Centro de Investigacion y Accion Social, Argentina. “In the early 2000s, when the country was recovering from the severe 2001-2002 debt crisis, minimum wages and enforcement were increased. Formal employment and wages also increased during that period.” These results, however, occurred at a time when the minimum wage was relatively low, both in absolute terms and as a share of the mean wage. “The actual policy, which combines a uniform minimum wage all over the country (implying a quite high minimum in the most underdeveloped provinces), and low levels of enforcement, is not the best instrument to exploit the benefits of minimum wage policy,” he said.

In South Africa, the minimum wage law in the agricultural sector has had a tangible impact on the labour market: farm workers’ wages shot up approximately 17% as a result of the law. The number of workers with a written employment contract also increased. Employment however, fell significantly. “Research on the impact of the minimum wage in agriculture in South Africa suggests that there were large job losses in the aftermath of the minimum wage,” said Haroon Bhorat, director of the Development Policy Research Unit at the University of Cape Town.  “However, it is crucial to note that when we applied the same methodology to five other minimum wage schedules (taxi, retail, domestic work, forestry, and security)  – no significant disemployment effects were reported.”

A call for more research and data

But many challenges remain. Chief among them is a shortage of data, which hinders the accurate assessment of the impact of minimum wage legislation on employment. As Shyam Sunder of the Institute of Human Development pointed out, “There is no such thing called All-India statistics as far as labour law enforcement is concerned. Poor compliance with the law is compounded by the fact that many states do not even submit information to the National Labour Bureau.”  

It is clear that more research is needed. But as Costa Rica research team member Tim Gindling of the Department of Economics, University of Maryland, pointed out, new evidence from the IDRC-supported research has highlighted the complex relationship between minimum wages, labour protection, and poverty. Initial findings suggest that “you can have a minimum wage program with increased enforcement and that labour protection does not necessarily have negative consequences,” he concluded.

Patralekha Chatterjee is a Delhi-based writer focusing on development issues in India and other emerging economies.

 
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IDRC funds researchers in the developing world so they can build healthier, more prosperous societies
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