april 25, 2005 prem learning week wendy cunningham (lcshs)

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?


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


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


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


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


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


Distributional impact of mw on individuals

WagesEmploymentSpecial groups

Mw can affect the wage distribution… for example


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


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…


For example, in Mexico:


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


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.


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


* 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.


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


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…


Mexico inequality decreases – poor benefit


-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


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


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


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


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

april 25, 2005 prem learning week wendy cunningham (lcshs)

Documents

mw population

mw earnersub mw earners0

relative mw levelshare

relative high mw

youth mw pop

mw pop equal

female mw pop

mw institutionshow big