( _asistencialismo_ ) or political favoritism ( _clientelismo_ ) as the beneficiaries are selected by the market. However, the unemployment impact on the most vulnerable workers suggests the importance, again, of taking an integrated view of social protection and to maintaining the complementarities of the various elements in mind. Raising wages to provide a decent standard of living for workers necessitates implementing some type of income security scheme for those who lose to guarantee that the target groups will experience a net benefit.

**_The minimum wage can be a severe barrier to macro economic adjustment._** The US and European literature is inconclusive on this issue. However, the critical difference in how Mexico and Colombia adjusted to their relative recessions of the 1990s appears in mandated maintenance, and in fact increase, in the real value of the minimum wage during the crisis.  This led not only to high and sustained levels of unemployment, but to a severe case of classic formal/informal dualism.<sup>32</sup>

**_Minimum wages are costly to public finances_** .  Social expenditures are closely tied to the minimum wage, so any increase in the minimum wage also has large implications for the public deficit.  The largest expenditure categories that are affected is the public sector wage bill, where a 10 percent increase in the minimum wage would increase total government expenditure by 1.4 percent in Panama, for example, and the pension system, where, for example, a 10 percent increase in the minimum wage in Brazil would increase pension payouts by 3.3 times more than the increase in receipts.  In addition, other social benefits ranging from salary bonuses to job training stipends to “shock benefits” (death in the family, birth, marriage, etc.) are denominated in minimum wages, and eligibility for social programs are tied to it.

**_Careful thought should be given to structure minimum wage institutions for it to be an effective policy tool_** .  Its objectives should be kept narrow and the expectations of its ability to resolve social inequity kept modest.  Changes in minimum wages should be informed by the evolution of labor productivity. A simple structure is easier to enforce and attempting to address all segments of the workforce generally fails. Both facilitate enforcement. The impact on the fiscal position is important and, as inflation falls, its enhanced role as a key nominal rigidity that exacerbates other labor market distortions rises.

# **Further work**

- **<u>Identification of the</u> “right” minimum wage** <u>.  The minimum wage regional study</u>

- documented one country where the minimum wage reduced poverty by benefiting the poorest (Mexico), and two countries with higher minimum wages where the impact was neutral or even detrimental to the poor.  Thus, the question remains, what is the “correct” level of the minimum wage such that it is high enough to maximize benefits for the poor, without tipping the balance such that it benefits other groups to the detriment of the poor.  More country studies, with varying levels of the minimum would allow for a more complete picture.

- **<u>Who benefits from minimum wage increases.</u>** Contrary to the US and Western Europe,

- where the minimum is mostly collected by youth, in LAC primary workers are also minimum wage earners and to date there is poor understanding of the overall profile of the minimum wage earner and hence the types of complementary social safety nets that are necessary.

> 32 See Fiess, Fugazza and Maloney (2003).

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