Does a minimum wage help workers?

• Author: Piyaporn Sodsriwiboon - Gabriel Srour
• Position: Senior economist in the IMF's Asia and Pacific Department - Senior economist in the IMF's African Department.
• Pages: 40-41

40 FINANCE & DEVELOPMENT | March 2019

BACK TO BASICS

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