**According to economic theory, an increase in minimum wage will lead to job losses among minimum wage workers in a labor market characterized by perfect competition** (see <mark>Neumark and Wascher, 2006, among others)</mark> . The negative effect of minimum wages on employment is thought to occur because employers may substitute minimum wage workers with other inputs, such as high-skilled non-minimum wage workers or capital.<sup>8</sup> Economic theory also predicts that higher wages will transfer to higher prices of inputs, which in turn will decrease production and labor demand. Yet, if the labor market is characterized by competition under monopsony, an increase in minimum wage could increase employment.<sup>9</sup> The potential effects of minimum wages may also depend on coverage and compliance (Posadas and Sanz-de-Galdeano, 2018).

**<mark>The empirical literature on the effect of minimum wage on employment is broad and the results are mixed.</mark>** <mark>Brown, Gilroy and Cohen (1982) conducted a broad review of the evidence from early minimum wage studies. The authors’ findings suggest that a 10 percent increase in minimum wage reduced teenage employment by 1 to 3 percent.  Neumark and Wascher’s (2006) review of more recent minimum wage research found a wider range of estimates of the effect of minimum wage on employment, which reflects the great variety of methods used in this newer research. A majority of the studies surveyed by Neumark and Wascher (2006) suggested a decrease in employment due to minimum wage increase. Interestingly, of those studies judged most credible, 85 percent reported a negative effect on employment.</mark><sup>10</sup> <mark>The stronger negative effect on employment was found in studies that focused on low-skilled workers. I</mark> n contrast, some more recent studies (Dube, Lester and Reich, 2010; Allegretto, Dube and Reich, 2011) found no adverse employment effects of minimum wage. Their results were recently questioned by <mark>Neumark, Salas and Wascher (2014a) and Neumark, Salas and Wascher (2014b). A</mark> mong studies conducted in the past few years, researchers found strong disemployment<sup>11</sup> effects of minimum wage (e.g., Baskaya and Rubinstein, 2016; Clemens and Wither, 2019; and Powell, 2016). These studies estimated elasticities ranging from about -0.3 to -0.5 for teenagers, and about -1 for minimum wage workers. Finally, recent empirical evidence also suggests that minimum wage reduces employment growth, which can be explained by labor-saving technology adoption caused by higher prices of labor <mark>(Meer and West, 2016</mark> ).

**Minimum wage may still be an effective tool for poverty reduction if the “winners” from minimum wage policy are disproportionately from low-income families.** While research on the United States suggests that minimum wages are ineffective at supporting the poor ( <mark>Neumark et al., 2005; MaCurdy, 2015</mark> ), evidence on developing countries is mixed ( <mark>Bell, 1997; Del Carpio, Messina and Sanz-de-Galdeano 2014; Gindling and Terrell, 2007 and 2009; Maloney and Nunez, 2000</mark> ). In sum, the effectiveness of minimum wage at helping the poor is context specific and depends on minimum wage workers’ characteristics. Therefore, it is crucial to examine who is potentially affected by minimum wage increase and to isolate the disemployment effect of minimum wages on poor families.

**In this paper, we use microsimulation techniques to evaluate the potential ex-ante impact of large changes to the minimum wage on labor market outcomes as well as poverty incidence.** <mark>Our objective</mark>

> 8 Note, however, that the substitution of low-skilled (minimum wage workers) for high-skilled workers may result in small overall employment declines, even if the disemployment effect among low-skilled workers is substantial (Neumark, 2018).

> 9 However, <mark>Neumark (2015) argues that labor markets for unskilled workers, which are most affected by the minimum wage, might be better characterized as competitive and the monopsony models are less applicable to them because they have high worker turnover and many similar employers.</mark>

> 10 These studies used data from Canada, Colombia, Costa Rica, Mexico, Portugal, the United Kingdom, and the United States.

> 11 “Disemployment effects” is a term commonly used in the minimum wage literature that means negative employment effects.

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