Evidence of the likely negative effect of the introduction of the minimum wage on the least skilled and poor through “labor-labor” substitution

Purpose This study aims to test one hypothesis regarding the impact of the minimum wage on poverty: an increase or the introduction of the minimum wage raises the cost of hiring relatively unskilled workers, and makes inputs that are good substitutes for such workers more attractive. Design/methodology/approach Placebo analyses confirmed that a labor–labor substitution is induced by the introduction of the minimum wage. Findings This study found a labor–labor substitution within low-skill groups induced by the introduction of the minimum wage for domestic and farming work in South Africa. Practical implications The evidence implies that the minimum-wage policy may not be as effective for poverty reduction as some governments in emerging and developing countries claim. Originality/value No studies were found on labor–labor substitution in the context of emerging or developing countries. The clear contribution of this paper using South African data clearly lies here.