https://orcid.org/0009-0004-2433-8230
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Abstract
Minimum wage (MW) policies are widespread in the developing world and yet their effects are still unclear. In this paper we explore the effect of national MW policies in Latin America’s six largest economies by exploiting the heterogeneity in the bite of the national minimum wage across local labor markets and over time. We find evidence that the MW has a compression effect on the wage distribution of formal workers. The effect was particularly large during the 2000s, a decade of sustained growth and strong labor markets. In contrast, the effect seems to vanish in the 2010s, a decade of much weaker labor markets. We also find suggestive evidence of a lighthouse effect: the MW seems to have an equalizing effect also on the wage distribution of informal workers.
Acknowledgements
We would like to thank David Fielding, Managing Editor of JDS and two anonymous referees for contributing to a greatly improved version of this paper. We are also grateful to María Laura Alzúa, Irene Brambilla, Guido Porto and participants in seminars at the PhD program in Economics at UNLP, Asociación Argentina de Economía Política, and XII Jornadas NIP - Capítulo de Uruguay (NIP) for helpful comments and suggestions. The authors are solely responsible for any remaining errors.
Disclosure statement
No potential conflict of interest reported by author(s).
Notes
1 See Lee (Citation1999) and Autor et al. (Citation2016) for the case of the US; Fortin and Lemieux (Citation2016) for Canada; and Butcher, Dickens, and Manning (Citation2012) for the UK.
2 In some years for some countries the minimum wage is not defined at the beginning of the year but in the middle of it, so these countries have 2 minimum wage levels in that year. Meanwhile, in other countries there may be more than two minimum wages per year (e.g. in Argentina due to high inflation). We take the annual average of the minimum wage in these cases.
3 we work with the national average minimum wage, for more information see Section 4.
4 Thus, when working with minimum hourly wages in our paper we are making the assumption that the monthly minimum wage for an 8-hour working day serves as a reference for employers in case their employees work more (or less) than 8 hours per day.
5 In Section 4, we further discuss the choice of the 75th percentile as the reference percentile. In addition, as robustness checks, we have also carried out the analysis using the 50th and the 90th as alternative reference percentiles (other reference percentiles commonly used in the literature). Conclusions are essentially unchanged. For more information, see Section 5.4.
6 We present specifications either with linear or quadratic district-specific time trends. In addition, we present another specification with country-specific linear time trends.
7 Specifications with linear trends also control for this but with fewer degrees of freedom.
8 This may be due to the fact that some workers report their out-of-pocket income and others report their gross income.
9 As an illustration, consider a scenario where the minimum wage is set at the fifth percentile of the underlying wage distribution (i.e., the distribution absent of measurement error and without a minimum wage) and does not have any spillover effects. Nevertheless, due to inaccuracies in reporting, there is a cluster of wage values around the actual minimum wage that extend from the first up to the ninth percentile. If the legislated minimum wage were to increase to the ninth percentile while the measurement error remains constant, the higher minimum wage would compress the observed wage distribution up to the thirteenth percentile. Consequently, this would result in a decrease in measured inequality by compressing the gap between the first percentiles and the median. This apparent spillover effect would be a characteristic of the data, but it would not accurately represent the true wage distribution.
10 For example, an increase in productivity in a given district that affects the activities of the low and medium skilled workers (due to the establishment of a new firm, the discovery of a mine, etc.) could positively impact their wages, thus decreasing the bite of the minimum wage in this region while increasing the value of the wage relative to p75. Therefore, this shock may exacerbate the effect of the EMW at the lower end of the wage distribution due to spillovers and generate an upward bias in the effect of the MW on inequality.
11 On average across the samples, the score of the first principal component of the EMW and its square explain 97.5% of the variability of the instrumented variables. Meanwhile, the score of the first component of the set of instruments explains 96.8% of their variability.
12 The value of the minimum wage is usually adjusted annually, although changes can occur at different times of the calendar year. We address this point by using an annual average based on monthly minimum wages.
13 Table B1 of the Supplementary Materials displays below, at, and above minimum wage groups for each country. Most Mexican workers earn above the minimum throughout the entire period, while Chile had a significant reduction in workers earning below. In addition, Argentina showed a sharp increase in the low group in 2004 and 2005, possibly related to a considerable increase in the minimum in 2003. These differences among countries may explain heterogeneous impacts, since minimum wage can affect inequality by changing wages levels and modifying the compliance of these policies.
14 We also experimented including country fixed effects and linear trends interacted with country dummies. This has virtually no impact on the results of our estimations.
15 It is worth noting that our results remain practically invariant to removing from our sample the countries with the fewest people earning less than the minimum wage, i.e. Brazil and Mexico (see Table B1). We also experimented including the district-level rate of unemployment as a control variable: this has virtually no impact on the estimated coefficients for any of our specifications. Results are available upon request to the authors.
16 Arango et al. (Citation2022) do not find consistent equalizing macroeconomic effects of the minimum wage for Colombia.
17 in the Supplementary Materials shows the variability in the effect of the EMW for each of the countries analyzed. Despite the differences in the precision of the estimates, we observe a common pattern across countries similar to the average effect found for Latin America shown in .
18 For literature studying the informal sector acting as a buffer for the labor market, see Ponczek & Ulyssea, Citation2022; Brambilla, César, Falcone, & Gasparini, Citation2023; Cruces, Porto, & Viollaz, Citation2018.
19 Tables B5 and B6 in Section A of Supplementary Materials complement Figure A5.