_Policy, Planning, and Research Working Paper Series_ 37

## **101. Measuring the Impact of Minimum Wage Policies on the Economy**

### Luis A. Riveros and Ricardo Paredes

_Traditional statistical techniques probably underestimate the negative effects of protective wage regulations on young and unskilled workers - who should be getting training, not minimum wages._ Our knowledge about the harmful effects of minimum wage regulations has been strongly influenced by statistical evidence from the industrial countries - which is often based on indirect estimates that do not take into account the many "discouraged job seekers" who withdraw from the labor force (and statistical samples) because of minimum wage regulations. Minimum wage regulations are probably more harmful than economists have assumed them to be.

Government regulation of the minimum wage is most likely to limit the job prospects ofyoung and uneducated or unskilled workers. Proportionately fewer women than men are affected by the minimum wage because women withdraw from the labor force and remain unemployed - or work in the informal sector and productive activities not accounted for in labor statistics.

Minimum wage regulations should probably not apply to young or unskilled workers or apprentices. It is less important to guarantee unskilled workers a minimum wage and more important to provide them with training that will increase their chances of rising above the need for wage protection.

This paper is a product of the Macroeconomic Adjustment and Growth Division, Country Economics Department. Please contact Raquel Luz, room Nli057, extension 61762.

## 102. Effects of the Multifibre Arrangement on Developing Countries - A Survey

### Junichi Goto

_The Multifibre Agreement (MFA), the most important restriction on textile and clothing exports, has damaging effects on many less developed countries, both in the short and long run._ The MFA consists of bilateral quotas against textile and clothing exports from developing countries. It thus derogates two GATT principles: nondiscrimination and the avoidance of quantitative restrictions. Despite this derogation, the MFAis administered under the auspices of GATT.

The primary purpose of the MFA is to restrict LDC shipments of textiles and clothing. Although the MFA quotas cost the consumer in importing countries a great deal, they save (or create) few jobs. The quotas are therefore a poor way to protect workers from foreign competition.

The MFA has a strong impact on LDCs in the short run for the following reasons:

* The forgone export revenue of LDCs, partly offset by the transfer of quota rents, is huge.

* Since individual quotas under the MFA are imposed on selected (often efficient) exporting countries, unrestricted (inefficient) countries may be able to increase their shipments at the expense of restricted countries. The MFAaffects the pattern of trade.

* Since the MFA puts a cap on the quantity (not the value) of shipments, it encourages the upgrading of goods.

The MFA also has an impact on the economic development in the long run. On the positive side, attempts to evade MFA quotas stimulate foreign investment from restricted suppliers, like Hong Kong, to nonrestricted countries. Investments to less restricted regions have helped economic development of countries in Asia (and perhaps toless extent in Latin America and the Caribbean).

But the MFA discourages countries from becoming 'too successful." For example, when Bangladesh showed success in clothing exports with the help of a Korean company, the developed countries negotiated bilateral restrictions with the poorer country. Thus the MFA tends to maintain the present configuration of textile and clothing trade - and therefore discourages dynamic shifts in trade based on comparative advantage.

This paper is a product of the International Trade Division, International Economics Department. Please contact Jean Epps, room S8-037, extension 33710.

# 103. **Industrlal Portfolio Responses to Macroeconomic Shocks - An Econometric Model for Developing Countries**

### James R. Tybout and Taeho Bark

_Rapid changes in the exchange rate significantly affect leverage and liquidity in the corporate sector._ Under what macroeconomic conditions are industrial growth and financial stability - or disaster - most likely in a semi-industrial country?

The question is addressed using an econometric model with the following features. Each firm's net income is a function of macroeconomic variables (such as output demand and interest rates) and firm-specific factors (such as physical asset shocks, currency exposure, and overall indebtedness). Each firm retains some portion of its income - how much dependson dividendpolicyandpast earningsperformance. Retained earningsadd to net worth and are distributed among specific assets and liabilities according to the same macroeconomic and firm-specific variables. These incremental additions to assets and liabilities set the stage for the next period's adjustment behavior.

Application of this model to Uruguayan raw data yielded these basic findings:

* Corporate income is very sensitive to output demand and the cost of dollar credit.

* Fluctuations in corporate income have a clear, direct effect on the rate at which net worth expands.

* Firms absorb most short-run fluctuations in net worth by adjusting assets, not debts.

* Corporate demand for peso credit is very unresponsive to the real peso interest rate.

The findings imply that rapid changesin the exchange rate or aggregate demand significantly affect leverage and liquidity in the corporate sector.

This paper is a product of the Trade Policy Division, Country Economics Division. Please contact Carla Cabana, room N8-065, extension 61539.