not a topic that has been researched extensively in developing countries. One exception is a study by Bosch and Manacorda (2010), who find that the steep decline in the real minimum wage accounted for a substantial part of the growth in inequality in urban Mexico between 1989 and 2001.

Do the equalizing effects of minimum wages translate into poverty reduction? Advocates often present minimum wage increases as an anti-poverty tool. However, some economists are more skeptical, partly because of 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, whereas the poorest households often do not have members in the formal sector 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 comes from Latin America. The conclusions vary. Some find that increases in the minimum wage reduce poverty (e.g., Morley 1995; Lustig and McLeod 1997). 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. A study by Gindling et al. (2007) on Nicaragua has also found a positive relationship between the minimum wage and the incidence of poverty, but only when the household head was affected. In contrast, some studies find no connection between minimum wages and poverty reduction (e.g., Neumark et al. 2006 for Brazil). Even where researchers do find such a link, they do not necessarily advocate minimum wages as an anti-poverty tool. Lustig and McLeod (1997) note 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 argue that reducing minimum wages in developing countries will hurt the poor, at least in the short run.

# _Impacts on productivity_

The effects of the minimum wage on productivity have been infrequently considered by researchers. Bassanini and Venn (2007), using aggregate cross-country data for 18 OECD countries from 1979–2003, estimated that a 10 percentage point increase in the minimum wageto-median wage ratio was associated with an increase of between 1.7 and 2.0 percentage points in long-run labor productivity and multi-factor productivity levels. No estimates for developing countries could be found for this review.

There are two likely reasons for a positive productivity effect. The first is the substitution of more skilled for less skilled labor due to the decreased demand for unskilled labor as minimum wages rise. To the extent that employers make this substitution, productivity levels will rise without any change in employment levels. The second possible reason is that employers could make productivity-enhancing adjustments (e.g., increased investments in training or new technologies) in response to the higher labor costs due to increases in the minimum wage.<sup>10</sup> As Bassanini and Venn (2007) note, these two reasons have very different implications. The substitution effect is essentially a shuffling of employment opportunities with undesirable 10