40 FINANCE & DEVELOPMENT | March 2019
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ART: ISTOCK / RASTUDIO
Does a Minimum Wage Help Workers?
An overly generous wage may prompt employers to cut jobs
Piyaporn Sodsriwiboon and Gabriel Srour
ALMOST EVERY COUNTRY has a minimum wage.
e details var y: some countries, such as France,
ﬁx a universal mi nimum across the economy,
while others, such as New Ze aland and South
Africa, di ﬀerentiate between sectors and t ypes
of workers. Typically, the minimum wage is set
by the government and revised periodically in
consultation with business and labor organiza-
tions (see chart).
Minimum wages have be en justiﬁed on moral,
social, and economic grounds. But the overa rching
objective is to boost incomes and improve the
welfare of workers at the low end of the ladder,
while also reducing inequa lity and promoting
social inclusiveness. Critics c ounter that rather
than improving welfa re, minimum wage s are
counterproductive because they d isrupt the
market for labor. ey argue that t here are other,
better-targeted, and less distortionary ways to
provide socia l assistance.
Impact on welfare
So does an increase in t he minimum wage actual ly
beneﬁt low-income workers? It depends.
First, employers may not comply with the min-
imum wage law. If no one actually receives t he
minimum, or if the law is mostly on paper, it is
irrelevant. For example, in countries with large
shadow economies, employers often give work-
ers under-the-table wage supplements, sometimes
known as “envelope payments,” to evade taxes or
the cost of providing beneﬁts. In th is situation, the
employer could react to an increase in the mini-
mum wage by reducing envelope payments, leaving
overall compensation uncha nged. Employers might
also underreport the number of hours employees
worked, also leaving tota l pay unchanged. Or the
employer might not report employme nt at all,
evading the minimum wage law entirely.
Second, even when minimum wage reg ulations
are fully respec ted, additional earn ings may face