regulation will have—and specifically the share of the labor market it will affect—different levels of enforcement might lead to different economic outcomes. In most low-income countries enforcement tightening cannot take place due to the lack of administrative and monitoring capacity governments face. Likewise, the logic that more enforcement would lead to a decline in aggregate employment also plays an important role when deciding the optimal level of enforcement (when that is an option). With tighter enforcement, less productive firms would be the most affected by the minimum wage and this would lead to important negative employment effects. Based on this rationale, Badaoui and Walsh (2022) use information across 22 developing countries with minimum wage regulations<sup>10</sup> to argue that an enforcement regime based on worker complaints can be used to target enforcement toward high-productivity firms and thus avoid the employment cost. The authors show that, while an increase in random enforcement may have large negative employment effects, if a substantial percentage of informal firms could not be viable at the minimum wage, a workers’ complaints-based enforcement would more likely rise compliance and wages in higher-productivity firms but have less impact on lower-productivity ones where workers have little incentive to complain. Contrary to the logic that more enforcement leads to bad employment outcomes Meghir et al. (2015) argue in the context of Brazil that enforcement-tightening does not increase unemployment, but it does increase wages and total welfare by enabling a better allocation of workers to higher-productivity jobs. Recent reviews of the economic impact of minimum wage regulations include Dube (2019),<sup>11</sup> , Manning (2021a) and Neumark (2019); and focusing exclusively on LMICs: Broecke et al. (2017), Belman and Wolfson (2016) and Bhorat et al. (2017).

# **4.2.1 Minimum Wage: Impact on Living Standards**

**The impact of the minimum wage on wages and labor earnings:** Starting with the evidence gathered for developed countries on wages: by construction (and if binding), the minimum wage raises the wages of employed low-income workers, so long as there is compliance with the regulation. Part of this wage gain arises from a worker reallocation or job upgrading by low-wage workers from smaller to larger, lower- to higher-paying, and from less- to more-productive establishments. Dustmann et al. (2022) find that up to 17% of the wage increase induced by the introduction of the German minimum wage in 2015 is accounted for by worker upgrading. In addition, there is evidence from the United States to suggest that a minimum wage increase also increases the productivity of workers, as long as workers are relatively well-monitored (Coviello et al., 2022).

Most of the evidence across developing countries also points to higher wages, especially at the lowest end of the wage distribution (Mansoor and O’Neill, 2021; Campos-Vazquez and Esquivel, 2021; Belman and Wolfson, 2016; Khurana et al., 2023). However, this finding is more nuanced in the developing country context. First, the extent of the effects on wages depends on the level of compliance with minimum wage regulation (Mansoor and O’Neill, 2021). Second, there is evidence that increases in labor supply following the minimum wage hike might mute the increase in wages.

> 10The study includes mostly middle-income countries, but there are a few low-income ones, such as Burkina Faso, the Democratic Republic of Congo, Madagascar, Mauritius, Mozambique, Niger, and Rwanda.

> 11Dube and Lindner (2023) analyze the impacts of local-level minimum wages.

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