Thursday, 10 February 2011

Minimum wages in Nicaragua

The effects of minimum wage are much debated, a debate that generates much heat but little light, at least outside of economics. In a new working paper Tim H. Gindling and Katherine Terrell look at The Impact of Minimum Wages on Wages, Work and Poverty in Nicaragua.

In the paper Gindling and Terrell use an individual- and household-level panel data set to study the impact of changes in legal minimum wages on a number of labour market outcomes: a) wages and employment, b) transitions of workers across jobs (in the covered and uncovered sectors) and employment status (unemployment and out of the labor force), and c) transitions into and out of poverty.

Their finding show that changes in the legal minimum wage affect only those workers whose initial wage (before the change in minimum wages) is close to the minimum - a result you would tend to expect. What they find is that increases in the legal minimum wage leads to significant increases in the wages and decreases in employment of private covered sector workers who have wages within 20% of the minimum wage before the change, but have no significant impact on wages in other parts of the distribution. So low wage/productivity workers are affected via increases in unemployment and increases in wages for those who are likely enough to keep their jobs.

Gindling and Terrell's estimates from the employment transition equations suggest that the decrease in covered private sector employment is due to a combination of layoffs and reductions in hiring. Most workers who lose their jobs in the covered private sector as a result of higher legal minimum wages leave the labour force or go into unpaid family work; a smaller proportion find work in the public sector. They find no evidence that these workers become unemployed.

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