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Abstract
Instead of merely setting a lower bound on the wages of formal sector workers, minimum wages serve as a norm for wage setting more generally throughout the Mexican economy. Our results suggest that wages are commonly set at multiples of the minimum wage, and that changes in minimum wages influence wage changes across the occupational distribution. Moreover, our findings suggest that these normative features of minimum wages have their greatest impact on the mid-to-lower tail of the wage distribution, including the informal sector of the economy. Thus, the results lend support to the view that declining real minimum wages and stabilization programs that strengthened the link between wage levels, wage changes, and minimum wages, might account for a portion of the growing wage inequality in Mexico over the period of the late 1980s and early 1990s.
Acknowledgements
We acknowledge the helpful comments of Jose Gavidia, Craig Gundersen, Tom Kelly, José Pagán, Julia Paxton, Richard Sutch, Aman Ullah, Chris Woodruff, Indranil Dutta and participants in presentations at the 2001 Latin American Studies Association Meetings, the 2002 Eastern Economic Association Meetings, and the Department of Economics at the University of California, Riverside. We are also grateful to UC-Mexus for financial support.
Notes
1 Bell's analysis utilizes panel data on a select set of formal sector firms. A similar analysis, but with a different, less-privileged set of formal sector firms, finds evidence of a significant employment impact of minimum wages (Feliciano Citation1998). And, indeed, Bell's own analysis suggests that, although few formal sector firms possess average wages that are less than the minimum wage, there is a significant number of workers in the formal sector who earn less than the minimum. While Bell views this as an indication that minimum wage policies might affect formal sector wages, others see this as evidence that minimum wage regulations are not well enforced even in the formal sector (Bravo and Vial Citation1997).
2 By way of comparison, the corresponding figures for the US are 11 percent for 1984 and 7.7 percent for 1992 (Source: US Census Bureau, Minimum Wage 2004, ).
3 A minimum wage increase may elicit general equilibrium effects on wages both above and below the minimum as workers who are displaced from the covered sector seek work and thereby depress wages in the uncovered sector, or as firms substitute for higher-skilled labor and thereby raise the wages of higher-paid workers in the covered sector.
4 For a discussion of the extent of wage inequality growth over this period and the factors that might account for this growth, see Alarcón and McKinley (Citation1997), Fairris (Citation2003) and the references cited therein. Cortez (Citation2001) offers evidence that declining minimum wages explain part of the growing wage inequality in Mexico over the period of the 1980s and 1990s, but does not consider the normative aspect of minimum wages, which is the focus of this paper.
5 Wages being determined by “norms” is a well established concept in economics. A classic reference is Akerlof (Citation1982). Levin-Waldman (Citation2002) makes a case for minimum wages serving as a reference point for firms' internal wage structures in the US. Living wage advocates have also made reference to “social norms,”“fairness,” and “ethics” as important determinants in the wage setting process (Robinson Citation2004; Prasch and Sheth Citation1999; Pollin and Luce Citation1998).
6 Freeman (Citation1993) cites the need for further research on the impact of stabilization policies on wages in developing countries.
7 From the mid 1980s to the mid 1990s the real value of the minimum wage in Mexico declined by 54 percent, but by only about 2 percent thereafter until 1999 (source: Table 20, The Mexican Economy 1996 and 1999, Banco de Mexico).
8 Castellanos et al. (Citation2004) in their paper on nominal wage rigidities in Mexico conclude that the wage rigidities and the effects of minimum wage were most prominent in the country during the late 1980s and the early 1990s.
9 The 13 states are: Aguascalientes, Baja California—Norte, Baja California—Sur, Campeche, Colima, Distrito Federal, Morelos, Nayarit, Quintana Roo, Sinaloa, Tabasco, Tlaxcala, and Zacatecas.
10 The additional 12 states are: Coahuila, Chiapas, Durango, Hidalgo, Mexico, Michoacan, Oaxaca, Puebla, Queretaro, San Luis Potosi, and Yucatan.
11 In 1984, our Zone A includes the states of Campeche and Zacatecas; Zone B includes the states of Aquascalientes, Colima, Morelos, Nayarit, Quintana Roo, Sinaloa, Tabasco, and Tlaxcala; and Zone C includes the states of Baja California Norte, Baja California Sur, and the Distrito Federal. In 1992, the states from our 1984 Zone A and B are combined along with the states of Coahuila, Chiapas, Durango, Guanajuato, Hidalgo, Estado de Mexico, Michoacan, Oaxaca, Puebla, Queretaro, San Luis Potosi, and Yucatan to form one zone, and Zone C remains the same.
12 For details on how the nonparametric kernel density is estimated refer to Pagan and Ullah (Citation1999, Chapter 2).
13 The clustering we observe is not due to rounding in either reported monthly income or hours worked. Within a given hourly wage cluster we observe numerous values for monthly income and hours worked.
14 Of these 45, 17 were within 5 percent of 1.25 times the minimum wage, 24 within 5 percent of 1.5 times the minimum wage, 2 within 5 percent of 1.75 times the minimum, and 2 within 5 percent of 2 times the minimum wage.
15 According to the statistical procedure, the 2 percent threshold is just about right for the 1984 data, but it is far too conservative for the 1992 data, where a much lower threshold for defining a cluster would pass a test of statistical significance.
16 We define formal sector workers as those who qualify for certain state-provided social benefits, the costs of which are partially paid for by registered employers.
17 We use the ±0.05 band of error in labeling the wage and multiples of the minimum wage a “match.”
18 The rankings of occupations are not exactly the same across zones, although they are roughly similar. For example, the lowest paid occupation is the same across all three zones, as is the highest paid occupation. In between, the ordering follows a general pattern, but is not exactly the same.
19 This is not to say that spillover effects are nonexistent in the US, but rather that they are generally much smaller (Brown Citation1999), limited to those at or near the minimum wage with little effect as one moves up the wage distribution (Neumark et al. Citation2004) and are normatively unrelated to minimum wage levels.
20 The results of this analysis and those that follow in this section are unchanged if, instead, either the Gini coefficient or the standard deviation of the log of wages is used as a measure of dispersion.
21 Unaffected workers make up a very small segment of the informal sector workforce. In the formal sector, the unaffected segment represents roughly 25 percent of the upper tail of the wage distribution in both zones.
Source: The minimum wage data is from the annual reports of Banco de Mexico. Coefficient of variation for wages is calculated by the authors from the ENIGH data sets.