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Are minimum wages a free lunch in LAC?. April 25, 2005 PREM Learning Week Wendy Cunningham (LCSHS). - PowerPoint PPT Presentation
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April 25, 2005PREM Learning WeekWendy Cunningham (LCSHS)
* This presentation is based on the book “Minimum Wages and Social Policy: Lessons from Developing Countries” (forthcoming). Unless otherwise stated, all the citations in this presentation are from this source.
Are minimum wages a free lunch in LAC?
Motivation for the issue & the book
LAC in the 1990s: wage stagnation, increased unemployment, and informal sector growth (in some countries)
Increasing Poverty and inequality
What tools can be used to slow down/reverse these trends without interfering with market forces that allows for global competitiveness?
Minimum wage was conceived of as a social justice tool, but can it be used to reduce poverty? Decrease national inequality? Aid certain groups?
A lot of OECD literature to learn from but LAC lessons may be different due to:
– A large informal sector in LAC– Little enforcement of mw– Low-wage earners include household heads– Weak social protection systems in LAC
individualsintroduction overview households conclusions policy
What does the literature tell us?
How does mw affect: LAC OEDC
Wage distribution + (aggregate) + (youth)
Unemployment + (aggregate) + (youth)
Household income Inequality
??? - (small)
policyconclusionshouseholdsindividualsoverviewintroduction
Main questions for the presentation
Are minimum wages a free lunch? What are the intended and unintended impact of the mw on worker and household well-being?
Are certain groups disproportionately affected by the mw?
policyconclusionshouseholdsindividualsoverviewintroduction
Overview
Who are mw earners?Mw institutions
How big is the mw population in LAC?
Up to 20% of the LF in LAC countries earn the mw
Up to 45% of the LF in LAC earns a sub-mw
policyconclusionshouseholdsindividualsoverviewintroduction
0% 20% 40% 60% 80% 100%
Uruguay
Argentina
Mexico
Jamaica
Brazil
Honduras
Bolivia
Chile
Costa Rica
El Salvador
Panama
Guatemala
Venezuela
Peru
Colombia
Nicaragua
Guyana
Ecuador
Paraguay
wage < 0.95*mw wage +/- 5% from mw wage > 1.05*mw
Women are over-represented among mw earners, especially in countries with a low (relative) mw
policyconclusionshouseholdsindividualsoverviewintroduction
Derived from Kristensen and Cunningham (2007)
-0.2
-0.1
0
0.1
0.2
0.3
0.4
Uru
guay
Jam
aic
a
Bra
zil
Arg
entina
Mexic
o
Boliv
ia
Hondura
s
Guate
mala
Chile
Peru
Costa
Ric
a
El S
alv
ador
Nic
ara
gua
Panam
a
Colo
mbia
Venezuela
Guyana
Ecuador
Para
guay
country, in increasing order of the mw level
sh
are
of
the f
em
ale
mw
po
p, re
lati
ve
to t
heir
sh
are
of
the L
F
Youth are over-represented among all mw earners, but less so in (relative) high mw countries
policyconclusionshouseholdsindividualsoverviewintroduction
Derived from Kristensen and Cunningham (2007)
-1
-0.5
0
0.5
1
1.5
2
country, in increasing order of the relative mw level
Sh
are
of
the
yo
uth
mw
po
p, r
ela
tiv
e
to t
he
ir s
ha
re o
f th
e L
F
In conclusion, who earns the mw?
Sub-minimum wage Young (16-19) Low skilled Informal employees Self-employed
Minimum wage Young (16-19) Low skilled Informal employees Women (slightly)
Women, unskilled, youth, and older workers are over-represented in countries where the mw is relatively low while men, prime-aged workers, formal sector are more represented in countries were mw is relatively high
policyconclusionshouseholdsindividualsoverviewintroduction
Over-representation does not necessarily mean that population is mostly earning mw
Argentina(1999)
Brazil(1996-2000)
Colombia(1984-2001)
Mexico(1999)
Female 19.9 21.8 25.7 13.2
Young (age <19) 70.0 40.0 63.0 25.6
Informal sector 31.7 23.0 n/a 16.9
Primary school or less 24.6 26.0 55.0 11.9
HH wealth quntile 1 24.5 n/a 75.0 14.6
HH wealth quintile 5 5.6 n/a 7.7 4.1
Proportion of labor force earning at or below the minimum wage, by demographic characteristic
policyconclusionshouseholdsindividualsoverviewintroduction
Distributional impact of mw on individuals
WagesEmploymentSpecial groups
Mw can affect the wage distribution… for example
policyconclusionshouseholdsindividualsoverviewintroduction
Brazil, 1999, Monthlyln(monthly wage)
Formal sector Informal sector
0 5 10
0
.5
1
Mexico, 1999, Monthlyln(monthly w age)
Formal sector Informal sector
5 10 15
0
.2
.4
.6
.8
mw
Kernel density plots show us that
Mw affects:– Formal sector wage distribution: Brazil, Colombia, Chile,
Peru, Ecuador, Paraguay, Panama, Nicaragua, Venezuela – Informal sector wage distribution: all the formal sector
countries + El Salvador, Mexico “fairness” in wages by occupation Spillover from formal sector (“efficiency wage”) Benchmark for wages in a particular occupation/region/group Lower equilibrium wages, so more chances for bite
– Numeraire effects in: Jamaica, Mexico, Brazil, Colombia
policyconclusionshouseholdsindividualsoverviewintroduction
Panel/Time series data regression analysis shows us that
An increase in the minimum wage has a positive (or neutral) effect on average wages … a 10% increase in the mw leads to a 3-6% increase in average wages
Lighthouse effect & numeraire effects An increase in the minimum wage generally
reduces wage inequality by increasing the wages more of low earning workers…
policyconclusionshouseholdsindividualsoverviewintroduction
For example, in Mexico:
policyconclusionshouseholdsindividualsoverviewintroduction
0
0.5
1
1.5
2
2.5
.2-.95 .95-1.15
1.15-1.5
1.5-1.8
1.8-2.2
2.2-2.5
2.5-2.8
2.8-3.1
3.1-3.5
3.5-4 4-4.5 4.5-5.5
5.5-7 7-10 10-40
wage, before mw increase, stated in terms of the minimum wage
% change in the wage if mw increases by 10%, by wage at t
Solid bar indicates that the estimate is significant at the 5% level
The wage effects are larger for men than women
policyconclusionshouseholdsindividualsoverviewintroduction
0
0.5
1
1.5
2
2.5
3
3.5
4
wage, in terms of the minimum wage, before the 1% increase
perc
en
t ch
an
ge in
avera
ge
wag
e
* The percent increase for men is given in the left bar and for women in the right bar. A solid bar indicates the coefficient is statistically significant at the 5% level, a white bar indicates that it is not. Source: Cunningham and Siga (forthcoming).
Percent change in the average wage if the mw increases 10%, by the wage at time t
Mw affect unemployment rates
An increase in the mw by 10% increases average unemployment probability by 0-2.5%, particularly in the formal sector.
This is experienced across the income distribution, but is more consistent for poorer workers.
policyconclusionshouseholdsindividualsoverviewintroduction
Probability of job loss in time t+1 due to a 1% increase in the minimum wage, Brazil
-0.1
0
0.1
0.2
0.3
0.5<m
w<0.9
0.9<m
w<1.1
1.1<m
w<1.5
1.5<m
w<2.0
2.0<m
w<2.5
2.5<m
w<3.0
3.0<m
w<3.5
3.5<m
w<4.0
4.0<m
w<5.0
5.0<m
w<6.0
6.0<m
w<9.0
9.0<m
w<12
.0
12.0<
mw<4
0.0
wage in time t
Women’s unemployment rises more than men’s when the mw increases
policyconclusionshouseholdsindividualsoverviewintroduction
* The solid bars indicate that the observed value is significantly different than 0 at the 5% level. The striped and spotted bars are not statistically different from 0 . Source: Cunningham and Siga (forthcoming).
Probability of job loss due to a 10% increase in the mw, by the mw range in time t (Brazil)
-4-3-2-101234567
pro
bab
ilit
y o
f lo
sin
g o
ne's
jo
b d
ue
to a
10%
in
cre
ase i
n t
he m
w
Male Female
Thus, the mw disproportionately affects certain groups
Women’s and young people’s wages benefit from mw increases, but men’s and older workers’ wages increase more
More unemployment among females, young, low skilled when the mw increases, as compared to men, older, and highly skilled workers.
Income of “vulnerable groups” is redistributed to less vulnerable segments of the labor force when the minimum wage increases.
policyconclusionshouseholdsindividualsoverviewintroduction
Mw and the distribution of household income
Household income inequality
The mw is not high enough to make a big impact on poverty poverty
The mw is sufficient to bring a family of 1 over the poverty line 11 countries
For a family with one dependent, it is sufficient for 7 of the 17 sampled countries
For a family with 3 dependents, it is sufficient for only 3
policyconclusionshouseholdsindividualsoverviewintroduction
0 1 2 3 4 5 6 7 8 9 10
Uruguay
Mexico
Venezuela
Jamaica
Ecuador
Bolivia
Peru
Nicaragua
Guyana
Panama
Brazil
Honduras
Guatemala
Colombia
Chile
Argentina
Costa Rica
DR
El Salvador
Paraguay
mw/$2 per day poverty line mw/poverty line
The effect of the mw on average household inequality depends on:
How the poor’s incomes respond to an increase in the mw, relative to the income of the non-poor
How the poor’s labor responds to an increase in the mw, relative to the labor of the non-poor
How quickly employment adjusts to a higher mw, relative to wage increases
Which are all a function of the size of the mw
3 data points…
policyconclusionshouseholdsindividualsoverviewintroduction
Mexico inequality decreases – poor benefit
policyconclusionshouseholdsindividualsoverviewintroduction
-1
0
1
2
3
4
Household income, in terms of the minimum wage, before the minimum wage increase
% change in household income, 10% increase in mw
No unemployment effects
Brazil inequality decreases in the SR, increases in the LR – poor are hurt, non-poor no effect
Change in household income from a 10% increase in the mw
-10
-8
-6
-4
-2
0
2
10th 20th 30th
household decile
contemporaneous lagged 3 quarters
policyconclusionshouseholdsindividualsoverviewintroduction
Lagged unemployment effects of the poor
Colombiainequality increases - poorest hurt, non-poor gain
Impact of a 1% increase in the mw on hhY and the Y gap, Colombia
-1
-0.5
0
0.5
1
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
hh centile in time t
pe
rce
nt
ch
an
ge
change in distance to median hh Y, % change in hh Y
policyconclusionshouseholdsindividualsoverviewintroduction
Poor are the unemployed
Conclusions
4 main lessons
Mw increase wages, but benefits the poorest only when the mw is near their market wages
A higher relative mw increases unemployment, a low mw does not
Mw redistributes income from more-vulnerable to less-vulnerable groups
Mw is not an effective tool to decrease household inequality – too dependent on intermediate impacts
policyconclusionshouseholdsindividualsoverviewintroduction
Policy Directions
Policy Directions. . .
1. A direct transfer scheme, rather than the mw, is a more efficient tool for income redistribution
BUTIf the mw is being used for redistribution, it should be
accompanied by a safety net for those who compensate those who pay the cost (those who lose their jobs) & the safety net needs to be targeted to certain populations, including women and youth
THENThe combination of mw + safety net can be superior to
direct transfer schemes
policyconclusionshouseholdsindividualsoverviewintroduction
Sources
Cunningham, Wendy (forthcoming) Minimum Wages and Social Policy: Lessons from Developing Countries. World Bank Press.
Kristensen, Nicolai and Wendy Cunningham (2007) Do Minimum Wages in Latin America and the Caribbean Matter? PRWP #3870
Cunningham, Wendy and Lucas Siga (in process) “Wage and Employment Effects of Minimum Wages on Vulnerable Groups in the Labor Market: Brazil and Mexico,” World Bank/LCSHS mimeo