Minimum wage coverage and compliance in developing countries

• Author: Martin OELZ,Uma RANI,Setareh RANJBAR,Patrick BELSER
• Published date: 01 December 2013
• DOI: http://doi.org/10.1111/j.1564-913X.2013.00197.x
• Date: 01 December 2013

International Labour Review, Vol. 152 (2013), No. 3–4

Copyright © International Labour Organization 2013

Journal compilation © International Labour Organization 2013

Minimum wage coverage

and compliance in developing countries

Uma RANI,* Patrick BELSER,** Martin OELZ**

and Setareh RANJBAR***

Abstract. Using household and labour force survey data from 11 developing

countries, the authors calculate rates of minimum wage compliance for formal/

informal employees covered by current legislation and assess the average “depth”

of violations. Though compliance is negatively related to the ratio of minimum to

median wages, countries with a national minimum wage set at a meaningful level

typically achieve higher compliance rates than countries with occupational or in-

dustry-specic minimum wage systems. However, better compliance – especially

for women, ethnic groups, and unskilled and informal workers – also depends on

contextualized yet comprehensive minimum wage policies combining union/em-

ployer involvement, awareness-raising and credible enforcement.

T

hough wage employment accounts for a comparatively small share of total

employment in many developing countries, their minimum wage regula-

tions typically apply to informal as well as formal wage employment. Yet min-

imum wage coverage and compliance are often overlooked in the literature,

although they are important determinants of the effective level of protection

provided to low-paid workers and their families. In particular, the exclusion of

vulnerable categories of workers from legal coverage defeats the very purpose

of a policy instrument whose primary objective is precisely to protect workers

at the bottom of the wage distribution. For example, out of the 52.6 million

women and men above the age of 15 who were recorded as domestic workers

globally in 2010, 22.3 million or 42.5 per cent were not covered by minimum

wages; in most of the cases (21.5 million), this happened in spite of the fact

that they lived and worked in countries where minimum wages did apply to

other workers (ILO, 2013a).

* Research Department, ILO, email: amara@ilo.org. ** Conditions of Work and Employ-

ment Branch, ILO, emails: belser@ilo.org and oelz@ilo.org. *** University of Geneva, email:

Setareh.Ranjbar@unige.ch. The authors would like to acknowledge with gratitude the meticulous help

provided by Laura Ravazzini and Marianne Fürer with the statistical analysis, and to thank Janine

Berg, Frank Hoffer and Sangheon Lee for their incisive comments on an earlier draft of this article.

Responsibility for opinions expressed in signed articles rests solely with their authors, and

publication does not constitute an endorsement by the ILO.

International Labour Review382

Compliance with minimum wage legislation should not be taken for

granted, however, even when only a fraction of workers are covered. In many

countries, the issue of enforcement presents a serious challenge due to lack

of transparency and communication, insufciently staffed labour inspector-

ates, weak sanctions, restrictions on freedom of association and/or weak trade

unions, sometimes compounded by the existence of a large informal economy,

with many casual wage earners deprived of effective protection (Ghosheh,

2013; Benassi, 2011).

The objective of this article is to highlight the gaps in minimum wage

coverage and compliance across a diverse group of 11 developing and emer-

ging countries in Africa, Asia and Latin America – namely, Brazil, Costa Rica,

India, Indonesia, Mali, Mexico, Peru, the Philippines, South Africa, Turkey and

Viet Nam. The article does not go into the controversial debate on the em-

ployment effects of minimum wages, on which there is an extensive literature.

Nor does it attempt to examine empirically the theoretical frameworks of the

compliance literature.1 Instead, it provides empirical estimates of the propor-

tions of wage earners that are in principle covered by minimum wage laws in

the different countries, and of the proportions of those technically covered

who are nonetheless paid less than the legal minimum. While earlier stud-

ies have measured coverage and compliance gaps in developing or emerg-

ing economies,2 this has never been done on a comparative basis for as many

countries and for two different time periods. Though the estimates we provide

from household-based or labour force surveys are necessarily imperfect and

subject to measurement errors, the results do provide striking support for the

proposition that more efforts should be devoted to lling the coverage and

compliance gaps in the future, in order to increase the effectiveness of min-

imum wages as a tool for social justice. As far as possible, the analysis brings

out not only the levels of non-compliance as they affect working women and

men, but also its incidence in respect of workers from particular social groups,

including ethnic groups and indigenous peoples.3

The article is organized into four sections. The rst and second provide

empirical evidence on the extent of coverage gaps and gaps in compliance,

respectively. The third section provides examples of strategies that have suc-

ceeded in raising compliance rates, even in countries where the minimum wage

was already set at a meaningful level relative to median or average wages. The

fourth section concludes.

1 See, for example, Ashenfelter and Smith (1979); Squire and Suthiwart-Narueput (1997);

Weil (2004 and 200 5); Basu, Chau and Kanbur (2010).

2

See, for example, Bhorat, Kanbur and Mayet (2012) on South Africa; Belser and Rani (2011)

on India; Alaniz, Gindling and Terrell (2011) on Nicaragua; Gindling and Terell (2010) on Hon-

duras; Cunningham (2007) on Latin American and Caribbean countries; Lemos (2004) on Brazil;

Jaramillo Baanante (2004) on Peru; and Harrison and Scorse (2010) on Indonesia.

3 While data disaggregated by sex were available for all 11 countries analysed in this

article, data by ethnic or social origin were available only for Brazil, India, Peru, South Africa and

Viet Nam (see Appendix, table 2).