- 22 -

employment. In the case of incomplete coverage, which is far more typical in developing countries given the huge size of the informal sector, the imposition of a minimum wage may be associated with lower employment and higher wages in the covered sector and higher low wage employment in the uncovered sector (as is the case with union negotiated wages that are too high)38/. Thus there are both winners and losers, the losers more likely to consist disproportionately of the less advantaged (lower skilled, younger workers, women with interrupted work experience) workers. There is reduction in total output, either through unemployment or through a misallocation of resources.

As discussed in the next section, minimum wages that are set too high could increase the employment loss associated with employer mandates and payroll taxes. If wages are free to adjust downwards, employers will typically pass on a substantial fraction of the costs of such mandates to workers thus reducing potential employment losses that could result. Minimum wages that are set too high introduce rigidity and prevent employers from passing on these costs to workers thus potentially leading to higher employment costs than in the absence of minimum wage.

In developing countries with a large informal sector (where it is more difficult to enforce minimum wages) in which women are more likely to be found, minimum wages benefit men disproportionately. Because a larger fraction of women are also in jobs with more flexible hours of work or part-time work, minimum wages set on a hourly basis may have fewer disincentive effects for hiring women than those set on a more lump-sum basis such as monthly wages39/. Minimum wages are set on a monthly basis in Chile, on daily basis in Indonesia and Mexico and on an hourly basis in the other 2 countries.

In the U.S., although the precise magnitudes of the relationships are yet to be pinned down, it is now widely agreed that increases in minimum wages do reduce employment opportunities, especially among teenagers. Most research has focussed on unintended consequences employment reductions. Very little research has addressed the question of whether minimum wage legislation is achieving its intended goal of reducing the incidence of poverty. The few for the U.S. that have considered this have found that minimum wage legislation has only a minor effect on the distribution of income. This finding is not surprising because not all low wage workers are members of low income families: e.g. teenagers. In other words, minimum wages more directly affect low wage workers, not low income families. Empirical evidence from Mexico based on data from formal sector manufacturing firms (Bell, 1994) shows virtually no disemployment effects for unskilled workers primarily because the minimum wages are set rather low relative to the distribution of wages. However, the use of household level data did suggest that the minimum wage had an important effect on the unskilled wage distribution in the informal sector, affecting in particular women and part-time workers.

It may be politically difficult to argue for elimination of minimum wage and countries face immense pressure to introduce or raise minimum wages as they develop. In the U.S., instead of elimination, people are arguing for youth sub-minimum or training wage. However, such sub-minimum wages for particular groups while retaining minimum wages for the rest may end up benefitting these groups relative to others, for example, in the U.S. teen employment at expense of adult.

38/ Mincer argues that under some circumstances, it may be rational for workers to remain unemployed for a while to search for jobs in the covered sector.

39/See Gill, Sedlacek and Nayar (forthcoming),