Measuring the Impact of Minimum Wages: Evidence from Latin America

Abstract

Simple numerical measures of the minimum wage may offer deceptive indications of its impact. Alternative measures, such as kernel density or cumulative distribution plots, are more reliable, and highlight influences higher in the wage distribution or on the sector. Panel employment data from Colombia - where minimum wages seem high and binding - show that the minimum wage can have important impacts on wages and unemployment across the wage distribution. Maloney, Nunez, and colleagues provide an overview of minimum wage levels in Latin America and their true impact on the distribution of wages, using both numerical measures and kernel density plots for eight countries (Argentina, Bolivia, Brazil, Chile, Colombia, Honduras, Mexico, and Uruguay). They especially try to identify numeraire effects - where the minimum is used as a reference higher in the wage distribution - and effects - where it influences wage setting in the unregulated or informal sector. Their main findings: First, statutory minimum wages are often misleading, and graphical methods may be more reliable. Second, the minimum wage's effect on wage setting extends far beyond what is usually considered and probably beyond the effect in industrial countries. Using panel employment data from Colombia, where minimum wages seem high and binding, the authors quantify the minimum wage's effects on wages and on the probability of becoming unemployed. The Colombian case confirms the evidence offered by kernel density estimates: The minimum wage can have an important impact on wage distribution in the neighborhood of the minimum wage. The effects echo up the wage distribution in a clear demonstration of the numeraire effect. That this effect is stronger in Latin America than in the United States suggests that the minimum wage induces further-reaching rigidities in the labor market. The tradeoff between any possible effect on poverty and reduced flexibility is likely to be more severe in countries where this is the case. The effects on employment, and unemployment, are substantial. Informal salaried wages are also affected, confirming the graphical evidence of strong lighthouse effects. Self-employment earnings are not, however, confirming that the minimum wage is not simply serving as a measure of inflationary expectations. This paper - a product of the Poverty Sector Unit and the Office of the Chief Economist, Latin America and the Caribbean Region - is part of a larger effort in the region to measure and understand the impact of labor market rigidities on employment and poverty.