Minimum Wages and the Welfare of Workers in Honduras

Abstract

Taking advantage of a complex minimum wage structure in Honduras, this paper examines how changes in minimum wages over the 1990-2004 period affect unemployment as well as the employment and average wages of workers in different sectors of the economy: medium and large-scale firms v. small firms in the private sector (where minimum wage legislation applies) and for civil servants and self-employed workers (where it does not apply). The evidence suggests that minimum wages are effectively enforced only in medium and large-scale firms, where a 1% increase in the minimum wage leads to an increase of 0.29% in the average wage and a reduction in employment of -0.46%. There is evidence that increases in the private sector minimum wage are emulated in public sector wages, but there are no disemployment effects there. We also find evidence that a higher minimum wage may increase unemployment (although the estimates are not robust). There are no discernable effects of minimum wages on the wages workers in smallfirms or the self-employed. Separate estimates of the wage and employment effects for workers in each of four education levels indicate that higher minimum wages have larger positive effects on the wages of the primary and secondary educated but the largest disemployment effect is on workers with primary education in large private firms. We conclude that, even in the sector where minimum wages are enforced and even under our upper bound estimate of the effect on the wages of workers, the welfare -- the total earnings -- of low-paid workers in the large-firm covered sector falls with higher minimum wages.