MINIMUM WAGES IN CAMBODIA 2

# 1. Introduction

Minimum wages are an extremely common policy instrument across the world. Consequently, there is an extensive literature that studies the consequences of minimum wage hikes, particularly in developed countries. In the United States, research has been inconclusive on the impact on employment, with results largely depending on the methodology used.<sup>1</sup> The debate in the developing countries is further complicated by the fact that there is a large informal sector where minimum wage regulations are difficult to enforce.<sup>2</sup> Or, in other cases, minimum wages are sector specific, and do not bind in other sectors. Hence, it is extremely important to understand how the minimum wage hike affects labor markets under various conditions.

This paper studies the impact of four minimum wage hikes between 2008 and 2015 on employment and wage earnings in Cambodia. Cambodia has a peculiar minimum wage regulation in that the national minimum wage only applies to wage workers in the garment and footwear industries. There are no other minimum wage regulations at a sub-national level, or in other sectors of the economy, except for public administration. Studying the impact of the minimum wage in Cambodia is akin to studying the impact of wage restrictions on a two-sector economy where the restrictions bind in only one sector.

Using an event study framework to examine the impact of these minimum wage hikes, ranging from 20-33 percent hike during the study period, I find that these hikes did not affect employment. Labor force participation, as well as participation in the garment and footwear sector, wage employment, and non-wage employment remain unaffected by these hikes. However, there are interesting dynamics in the quarters just before the hike and in the two subsequent quarters. Employment in the affected sectors jumps up in the preceding quarter and falls in the subsequent two quarters following the hike, but the participation rates fall back to their usual pre-hike levels in the subsequent quarters.

The observed lack of impact on participation is consistent with the mixed results observed in other contexts. In developed countries, where the level of minimum wages is lower than market wages, the impact on overall employment tends to be small or nonexistent (see Machin, Manning and Rahman (2003) and Stewart (2004) for the UK; Dube, Lester and Reich (2010) in the US, for instance).<sup>3</sup> In developing countries, where the minimum wage levels are high, studies find mixed results. Many studies often find negative effects on employment, at least in the covered formal sectors, and no effect or a positive impact on

> 1Studies that rely on across-state variation seem to find a negative impact (for example, Neumark, Salas and Wascher, 2014), whereas those that rely on local-level variation seem to find no impact on employment (see Card and Krueger, 1994; Dube, Lester and Reich, 2010; Jardim et al., 2018). See Neumark, Wascher et al. (2007) for a review of the literature.

> 2However, Dinkelman and Ranchhod (2012) find that a minimum wage hike can have large impacts even in settings where formal enforcement is weak; Khamis (2013) finds larger effects in the informal sectors.

> 3However, as mentioned earlier, there is still a debate about the employment effects in the US.