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estimated that policies and institutions accounted for the largest share in the increase in the 9<sup>th</sup> /1<sup>st</sup> earnings decile ratio, more than technological change and much more than globalization. Declining real minimum wages are one of the institutional changes driving this inequality. This has been established for developed countries for a number of years—for example, DiNardo, Fortin, and Lemieux (1996) find that a falling real minimum wage explains a substantial proportion of the increase in U.S. inequality in the 1980s. Now research for developing countries is making the same association. For example, Bosch and Manacorda (2010) analyzed household data in urban Mexico from 1989-2001 and found that the steep decline in the real minimum wage accounted for a substantial part of the growth in inequality over this period.

But do the equalizing wage effects of higher minimum wages translate into poverty reductions? Indeed, advocates often present minimum wages as an anti-poverty tool. Proponents argue that, not only do minimum wages raise the earnings of low-wage workers but, because of intrahousehold transfers and the link with many social benefits, they have broader ripple effects (Eyraud and Saget 2008). On the other hand, many economists are more skeptical, partly because of any disemployment effects but even more because of the targeting of minimum wage rules—i.e., many workers covered by minimum wage legislation are not in poor households while the poorest households often do not have members covered by minimum wage rules. In a theoretical exposition, Fields and Kanbur (2007) show that the poverty impacts of the minimum wage are indeterminate and depend on the degree of poverty aversion, the elasticity of labor demand, the relationship between the minimum wage and the poverty line, and the extent of income sharing within the household.

The empirical evidence on the minimum wage-poverty relationship in developing countries largely comes from Latin America. The conclusions vary. Some find that increases in the minimum wage do reduce poverty (e.g., Lustig and McLeod 1997; Morley 1995). Gindling and Terrell (2006), using micro-data for Honduras, estimate that a 10% increase in the minimum wage reduced the likelihood of extreme poverty by 1.8% and poverty by 1% in that country. On the other hand, there are examples of studies that find no connection between minimum wages and poverty reduction (e.g., Neumark, Cunningham, and Siga 2006, for Brazil). Even where researchers do find such a link, they do not necessarily advocate minimum wages as an antipoverty tool. Lustig and McLeod (1997: 81) point out that their results should not be seen “as a flat endorsement of minimum wages as a cost effective policy to reduce poverty” because of potential negative employment and growth effects, particularly in the long run. Nonetheless, they do argue that reducing minimum wages in developing countries will hurt the poor, at least in the short run.

# **_3.2  Impacts on productivity_**

The effects of the minimum wage on productivity have been considered by researchers only infrequently. One systematic analysis to measure the productivity effect was carried out by Bassanini and Venn (2007), using cross-country aggregate data for 18 OECD member countries from 1979-2003.<sup>25</sup> They estimate that a 10 percentage point increase in the minimum wage-tomedian wage ratio was associated with an increase of between 1.7 and 2.0 percentage points in 25 This research is also reported in OECD (2007).