| POLICY RESEARCH WORKING PAPER 2597

# Summary findings

Maloney, Nufiez, and colleagues provide an overview of minimum wage levels in Latin America and their true impact on the distribution of wages, using both numerical measures and kernel density plots for eight countries (Argentina, Bolivia, Brazil, Chile, Colombia, Honduras, Mexico, and Uruguay). They especially try to identify "numeraire" effects-where the minimum is used as a reference higher in the wage distribution-and "lighthouse" effects-where it influences wage setting in the unregulated or "informal" sector.

Their main findings: First, statutory minimum wages are often misleading, and graphical methods may be more reliable. Second, the minimum wage's effect on wage setting extends far beyond what is usually considered and probably beyond the effect in industrial countries, Using panel employment data from Colombia, where minimum wages seem high and binding, the authors quantify the minimum wage's effects on wages and on the probability of becoming unemployed. The Colombian case confirms the evidence offered by kernel density estimates:

* The minimum wage can have an important impact on wage distribution in the neighborhood of the minimum wage.

* The effects echo up the wage distributi )n in a clear demonstration of the "numeraire" effect. That this effect is stronger in Latin America than in the Uni -ed States suggests that the minimum wage induces furtherreaching rigidities in the labor market. The tradeoff between any possible effect on poverty and reduced flexibility is likely to be more severe in countries where this is the case. The effects on employment, and unemployment, are substantial.

* Informal salaried wages are also affectrd, confirming the graphical evidence of strong lighthouse effects. Selfemployment earnings are not, however, **coI** firming that the minimum wage is not simply serving as a measure of inflationary expectations.

This paper-a product of the Poverty Sector Unit and the Office of the Chief Economist, Latin America and the Caribbean Region-is part of a larger effort in the region to measure and understand the impact of labor market rigidities on employment and poverty. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Anne Pillay, room 18-104, telephone 202-458-8046, fax 202-522-2119, email address apillayC@worldbank.org. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. William Maloney may be contacted at wmaloney@worldbank.org. April 2001. (26 pages) _rhe Policy Research Working Paper Series disseminates the findinigs of work in progress to encourage the exchange of ideas about developrment issues. An objective of the series is toget thefindings out quickly, even if the presentations are less than fully potished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. 7hey do not necessarily represent the view of the World Bank, its Executive Direct ars, or the countries they representt._ Produced by the Policy Research Dissemination Center