Do Minimum Wages in Latin America and the Caribbean Matter? Evidence from 19 Countries
| Author | Nicolai Kristensen |
| Profession | Executive Directors |
| Pages | WPS3870 |
- Nicolai Kristensen (COWI), Wendy Cunningham1
Page 1
The objective of the minimum wage is to guarantee a socially acceptable wage, and thus a decent standard of living, for all workers.2 Neoclassical economics predicts that mandating a wage that is higher than the market wage may increase the wages of some low-skilled workers, but at a cost to other low-skilled workers who lose their jobs as employers adjust, whether through higher payments to other workers or a substitution away from labor into capital. A vast literature in the United States and Europe shows that the neoclassical model does not strictly hold since minimum wage legislation seems to have negligible to very small positive impacts on unemployment and wages.3,4 The effects that can be statistically identified are primarily limited to teenage workers, who tend to earn wages near the minimum wage, but there is little evidence of any impacts on adult workers. Not surprisingly, the poverty impacts of minimum wages are also absent, due to the fact that minimum wages have little impact on wages or employment and many minimum wage earners in these countries are not among the poor, but instead are young workers who live in non-poor families (Burkhauser, 1996). Together, these facts bring into question the role of the minimum wage as an anti-poverty tool.
Recent literature in Latin America suggests that perhaps we should not dismiss the minimum wage since it seems to have different effects in the specific labor market conditions in the Page 2 Region. Specifically, 30-70 percent of Latin American workers are employed in the informal sector (Maloney, 2004), which, by definition, is not bound by a minimum wage; the low-wage population in Latin America includes many adult workers so the results may be more widely felt across the economy; and alternative wage-setting mechanisms developed in Latin America due to, among other factors, hyper-inflation and protectionism.
Turning to the literature, we find that minimum wages have the expected neoclassical impacts in several Latin American countries: a positive effect on formal sector wages and an increase in unemployment rates in the few countries for which studies exist.5 The evidence on the impact of minimum wage legislation on the informal sector is mixed: some studies - mostly in Brazil - find that there are positive wage and negative employment effects, as predicted by neoclassical theory for competitive labor markets (Fajnzylber 2002; Maloney and Nuez, 2004; Neri, Gonzaga, and Camargo 2002; Soares 1998; Foguel, Ramos, Carneiros 2000; Lemos 2002), while others find decreased average wages and increased employment in the informal sector due to the general equilibrium effects of the impacts on the formal sector in a dualistic economy model (Gindling and Terrell 2005 for Costa Rica; Carneiro 2002 for Brazil). Fewer studies examine how the minimum wage affects the overall wage distribution, particularly in the informal sector (Maloney and Nuez 2005, Lemos 2002, Bell 1997, Neri, Gonzaga, and Camargo 2000, Soares 1998).
This paper examines trends in minimum wage legislation in the Latin America and Caribbean region, rather than focusing on a specific country, by laying out a series of facts to shed light on the institutional and labor market implications for minimum wages in the region. It begins by describing the minimum wage institutions in 24 Latin American countries and shows, Page 3 not surprisingly, that it is not possible to speak of a single LAC minimum wage institution.
Next, it examines evidence on who the minimum wage earners are in LAC in order to determine if they are few and far between, as in the OECD countries, or if they are a substantial portion of the workforce. Given this background, it expands on the Maloney and Nuez (2004) eight country analysis6 to study the wage distributions of 19 LAC countries to determine if the minimum affects the distribution and whether the institutional factors may contribute to the observed trends.
While all Latin American countries have a legislated minimum wage, there is not a common "minimum wage system" for Latin America and the Caribbean (LAC). Table 1 describes the minimum wage institutions in 24 countries in LAC in terms of: the number of minimum wages, work period covered by the minimum, scope of minimum wage setting, the body that determines the minimum, frequency that it is changed, criteria for adjustment, sub-minimum payments, whether it applies to the public sector, and sanctions for non-compliance. Perhaps the only commonality across the region is that the goal of the systems is to set a wage floor that provides a minimum standard of living for the worker and, in some cases, his/her family. In many countries, minimum wages are Constitutionally mandated, some dating back to the 1930s, when the concept of a minimum wage was new to the world (Starr 1982).
The individual institutions that have developed in Latin America and the Caribbean over time show a wide range of minimum wage levels and categories (Table 1). While Argentina, Page 4 the Bahamas, Bolivia, Brazil, Haiti, and Trinidad and Tobago are the only countries in LAC with a single minimum wage, and many others have a few well defined minimum wages (two in Colombia and Jamaica; three in Chile; and four in Belize and Peru), some countries, such as the Dominican Republic, Ecuador, Guatemala, Mexico, Paraguay, and Venezuela, have hundreds of legislated minimum wages. Special minimum wages may be set for apprentices,7 the public sector,8 youth,9 workers with disabilities (Argentina, Chile, Honduras, Paraguay), domestic workers (Haiti, Honduras, Nicaragua, Paraguay, and Uruguay), or specific occupations, including soccer players in Peru, the self-employed in Chile, street vendors in the Dominican Republic, bee farmers in Mexico, and bakers in Guatemala. All countries define a minimum wage by time spent working (hour, day, or month), but some have extra legislation by task (Uruguay, Dominican Republic), output quantity (Dominican Republic, and Guatemala), or even horsepower of the equipment (Dominican Republic). The coverage of the minimum wage may be national,10 regional (Mexico), by occupation or industry/activity,11 task, firm size, or any mix of these (Table 1).
The patterns that emerge from the Latin American institutions suggest that tripartite wage setting is associated with complex minimum wage systems. While the government alone sets the minimum wage in some countries (Brazil, Bolivia, Ecuador, Jamaica, and Uruguay), a tripartite committee comprised of government, worker representatives, and employer representatives is the wage-setting body in others,12 while worker and employer representatives set the wage in still Page 5 others (Table 1). Those countries with the most complex wage structure (i.e. hundreds of minimum wages) tend to be those where the wage is set by a tripartite council.13
The minimum wage is changed on a regular basis (every six months or annually) in about half the countries, with discretionary changes in others.14 Adjustments to the minimum wage may be tied to inflation (in half the countries), GDP fluctuations, the poverty line or market wages (Table 1). In Paraguay and Haiti, the legislation states that inflation rates equal to or higher than 10 percent should trigger a renegotiation of the minimum wage.15 Although many countries have a formula to set the minimum wage, in the end, the calculation is fairly random, based on public perceptions of fairness, economic expectations, and a myriad of other criteria that are difficult to weight or quantify in an objective manner.
Sanctions for non-compliance are regulated, but interviews suggest that enforcement is weak. The fines imposed on firms that do not abide by minimum wage laws range from one to 150 times the minimum wage (Table 1). No fines or punishments are legislated in Costa Rica, Jamaica, or Mexico.16 In some countries, enforcement is legislated, but not carried out due to a lack of resources - ranging from a lack of vehicles to do inspections to no telephones to receive complaints from workers. The scarce data on enforcement show that fines are rarely imposed. In Chile, for example, 244 fines were issued in 2001, totalling $60,000, as compared to the $2.9 million collected in fines for all labor violations that year. This would suggest that minimum Page 6 wages would have little impact in Latin America, since the wage is paid at the discretion of the employer, with little government oversight, or if there is, little cost of punishment.
Heterogeneity in minimum wage institutions is not limited to LAC. Across the world, the number of minimum wages, coverage, minimum wage setting mechanisms, and enforcement mechanisms differ. For example, Italy and Germany have hundreds of minimum wages that are negotiated and enforced by unions under a strong contract law framework. Australia's hundreds of minimum wages are part of a larger labor "awards system" which specifies all remuneration for job types by states (though this is being simplified). In the United States, the federal minimum wage may be over-ridden by the state minimum wage; state inspectors are responsible for enforcement. In Japan, each prefecture (state) has its own minimum...
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