The impact of minimum wages in Mexico and Colombia

There are diverging views about how minimum wages affect labor markets in developing countries. Advocates of minimum wages hold that they redistribute resources in a welfare-enhancing way, and can thus reduce poverty, improve productivity, and foster growth. Opponents, on the other hand, contend that minimum wage interventions result in a misallocation of labor and lead to depressed wages in the very sectors - the rural and informal urban sectors - where most of the poor are found, with the effect of wasting resources and reducing the growth rate. Data from Colombia and Mexico for the 1980s provide an opportunity to evaluate the impact of minimum wages. In Mexico in the 1980s, the minimum wage fell in real terms roughly 45 percent. By 1990, Mexico's minimum wage was about 13 percent of the average unskilled manufacturing wage. During the same period, the minimum wage in Colombia increased at nearly the same rate, reaching roughly 53 percent of the average unskilled wage. The author charts how the mandated minimum wage affected the demand for skilled and unskilled labor in both countries during that decade. Findings are as follows. In Mexico, minimum wages have had virtually no effect on wages or employment in the formal sector. The main reason: the minimum wage is not an effective wage for most firms or workers. In the informal sector, in turn, there is considerable noncompliance with the mandated minimum wage, especially among part-time and female workers. As a result, significant numbers of workers are paid at or below minimum wages. In Colombia, minimum wages have a much stronger impact on wages, judging from their proximity to the average wage and both cross-section and time series estimates. The estimates imply that the elasticity of low-paid unskilled employment with respect to minimum wages is in the range of 2 to 12 percent.