The payslip: effects of the minimum wage?

Dr Sara Lemos from the Department of Economics discusses the impact of a minimum wage on developing countries.

When the monthly payslip arrives it is a time of joy for those who can see their shopping sprees on the horizon, and perhaps a time of relief for those whose bills are overdue. In the UK, the minimum wage for an adult over 21 years of age is £6.31. When the minimum wage changes, workers do not often spare a thought for how this might affect the British economy, let alone how minimum wage figures affect overseas countries.

Literature about the minimum wage contains limited evidence concerning its impact on developing countries. The available literature, which is mostly based on US evidence, shows that a minimum wage increase results in a reduction in wage inequality following a wage increase for those earning low wages and no wage increase for those earning higher wages. This literature also shows a minimum wage increase results in a small adverse effect on employment.

The economics of the minimum wage is different in developing countries, where the minimum wage affects many more workers, and labour institutions and law enforcement differ in important ways. For example, the limited evidence for Latin America indicates that the wage compression and employment effects are considerably stronger in developing countries than they are in developed countries. Nonetheless, this literature consists of few studies (mostly one or two for each country) and the results are sometimes conflicting.

Using a monthly household survey panel in Brazil from 1982 to 2004, evidence of a wage compression effect in both the formal and informal sectors can be found. The principal finding is evidence that the minimum wage compresses the wage distribution of both sectors but does not affect employment levels with neither the number of jobs nor the number of hours worked changing in either sector. The results are robust to different estimation strategies and to a number of robustness checks. For example, the compression effect is stronger for low educated workers, which could hint at more adverse employment effects. Nonetheless, no employment effects could be found. Also, no employment effects could be found for the self-employed, despite the presence of wage effects.

The main policy implication deriving from these findings is that the minimum wage could be an effective policy tool in the fight against poverty and inequality without destroying too many jobs in Brazil. The minimum wage is effective not only in the formal, but also in the informal sector, where legislation is presumably not complied with. It might therefore be a more effective policy to reduce poverty than those policies that attempt to incorporate informal sector workers into the formal sector, which might generate higher unemployment. Minimum wage policy could then be complemented by other policies specifically targeted at the poorest 10%, as the minimum wage does not reach those at the very bottom of the informal sector wage distribution.

It seems that there is much more to the payslip, which many people see as a simple piece of paper indicating how much money they have earned that month, than meets the eye.

Dr Sara Lemos

Research interests

• Labour economics, wages and employment in general
• Economics of migration
• Economics of crime

Supervision interests

• The economic effects of migration

Contact details

• sl129@le.ac.uk
• 0116 252 2480
• Visit Sara's staff page