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measured by employment. Hours would be a more complete measure, to the extent that employers can adjust to higher minimum wages through working time rather than the number of jobs. Another possibility is that the typical short-term time horizon for minimum wage research misses effects that increase over time.<sup>21</sup> For example, Baker, Benjamin, and Stanger (1999) and Neumark and Nizalova (2007) estimate, for Canada and the U.S. respectively, lagged negative employment effects that are significantly stronger than contemporaneous ones.<sup>22</sup> This is clearly an issue that merits more research in the future. Finally, as Freeman (2010) notes, policy-makers are aware of the potential harm that very high minimum wages could create so they tend to set them at a reasonable level.<sup>23</sup>

# _Earnings_

The impact of minimum wages on earnings is less contentious than its effects on employment levels. Virtually all studies that estimate the wage effect find, not surprisingly, that formal-sector wages rise with higher minimums. As would be expected, the positive impact is strongest around the minimum wage, persisting somewhat above the minimum because wage relativities are maintained, but diminishing as one moves further up the wage distribution (e.g., Gindling and Terrell 1995; Fajnzylber 2001; Maloney and Nunez Mendes 2004).<sup>24</sup> More surprising has been the observation that increases in the minimum wage often raise, rather than depress, wages in the informal sector. This finding has been most notable in studies of Latin American countries (e.g., Gindling and Terrell 2004; Lemos 2004; Fajnzylber 2001; Maloney and Nunez Mendes 2004), It has been most commonly been attributed to the _"Efeito Farol"_ or "lighthouse effect", whereby the minimum wage is seen as a benchmark wage for unskilled labor throughout the economy, including the informal sector where it is not binding. But there are also competing theories, based on a variety of possible substitution and sorting effects (Boeri, Garibaldi, and Ribeiro 2010).

The empirical research is also consistent in demonstrating that the minimum wage compresses wage distributions and reduces earnings inequality. For example, Lemos (2004, 2007) finds wage compression in both the public and private sectors as a result of minimum wage increases in Brazil. Gindling and Terrell (1995) and Fajnzylber (2001) document wage compression in Costa Rica and Brazil, due to positive wage impacts being strongest for low-wage workers.

An important question concerns the role of minimum wages in the long-run increases in earnings inequality that have been observed in many countries. While technological change and globalization have traditionally been seen as the main drivers of this inequality, policy shifts have also been identified as an important factor as well (e.g., Koeniger, Leonardi, and Nunziata 2007). In fact, in its recent cross-country analysis of growing inequality, the OECD (2011b)

> 21 This focus has generally been justified by two arguments: that adjustments for low-wage labor happen quickly and that minimum wage changes are typically announced well in advance of implementation so employers have time to prepare (Brown 1999).

> 22 In fact, Neumark and Nizalova (2007) find positive employment effects in the short run but negative ones in the long run.

> 23 Where minimum wage increases are very large or are made at a time when labor demand is weak, more significant negative effects can be expected.  This point is made by Kucera and Roncolato (2008) in explaining the negative impacts of Colombia’s minimum wage increases in the late 1990s.

> 24 There is essentially no evidence on whether non-wage benefits decrease because of these wage gains.