New Policy in Focus: Can the minimum wage be a tool in combating inequality?


By Denise Marinho dos Santos, Communications Officer

Brasília, 18 September 2018 - Can the minimum wage be a tool to combat inequality? The answer to this question is not simple, let alone unanimous. The new issue of the Policy in Focus magazine, titled “Minimum wage: global challenges and perspectives”, presents different takes on the implementation of minimum wage policies and their effects on poverty reduction, inequality and inclusive growth worldwide, as well as potential negative effects and current trends in policy design. Published by the International Policy Centre for Inclusive Growth (IPC-IG), this special edition features nine inspiring articles by leading experts and scholars on minimum wage contexts in Latin America, Europe, Asia and sub-Saharan Africa, as well as on more specific country contexts such as in the United States, China, India and France.

Since its creation 124 years ago, the popularity of the minimum wage among policymakers and the public at large has risen and fallen. Currently, more than 90 per cent of the world’s countries have minimum wage laws, according to the International Labour Organization (ILO). Despite that fact, global inequality has increased over the last decades. As inequality can hinder economic growth, reduce well-being and increase poverty, great attention has been given to the role of fiscal redistribution (or lack thereof) in the inequality debate. In that light, mechanisms that involve money passing directly from one economic agent to another, rather than through the hands of the State, deserve more attention.

In a time of weakened labour unions and decreasing income mobility, a question remains: Can the minimum wage once again shine as a market-friendly and effective policy tool?

"It certainly stands as an alternative to tax and transfer, which is a tried-and-true tool in reducing inequality, but which is not market-friendly. Maybe the minimum wage can be seen as a market-friendly mechanism in the sense that it uses the market and not the government's budget to reduce inequality. I certainly hope that perhaps we can see the minimum wage coming back as one of the options that policymakers and societies as a whole have to reduce inequality", said Sergei Soares, the specialist guest editor for this issue. Sergei is a Researcher at the Institute for Applied Economic Research (Ipea) and Research Coordinator at the IPC-IG.

“I think the main finding of this special issue is that we cannot increase the minimum wage indefinitely. The minimum wage remains a relevant policy option, but it is not a ‘magic bullet’ which will solve all inequality”, he added.

The issue opens with an article by Patrick Belser and Ding Xu (ILO), introducing current trends and policy design issues around the minimum wage. The authors explain that the recent return of this theme to the forefront of the international policy agenda can be partially explained by the failure of past reforms in many countries to deliver inclusive growth.

In the following piece, Sergei Soares (Ipea) and Joana Silva (World Bank) seek to explain that, given the interplay between the formal and informal sectors of the economy, as well as questionable enforcement of minimum wage legislation, the analysis of the effects of the minimum wage on wage inequality more complex in Latin America than in developed countries. Still in the realm of Latin American countries, Andrés Marinakis (ILO) analyses the extent to which countries in the region have managed to reconcile ostensibly opposing interests such as the needs of workers with the economic viability of companies and a smoothly operating labour market, given that all countries in the region currently have minimum wage systems. The article provides a series of proposals to better enforce this instrument of social protection.

In turn, T. H. Gindling (University of Maryland Baltimore County, UMBC) presents the impacts of multiple legal minimum wages set in various Central American countries, such as Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. He finds that improving compliance may be a more effective way to improve the earnings of the lowest-paid workers than simply raising the level of the minimum wage.

In the USA, many states are debating the ‘USD15 minimum wage idea’ as a mechanism to increase workers’ incomes and reduce poverty. This theme is at the core of David Neumark’s article (University of California in Irvine and Economic Self-Sufficiency Policy Research Institute), which sheds light on the possible effects of increasing the minimum wage on unemployment and poverty.

Across the Atlantic, Gilbert Cette (University of Aix-Marseille and French Minimum Wage Commission), discusses in his piece the main elements of the debate around a national minimum wage (NMW) in Europe, with a continental perspective which then narrows down to France. In the European debate, some have even proposed the implementation of a European minimum wage. An NMW exists in 22 of the 28 countries of the EU (the only exceptions are Austria, Cyprus, Denmark, Finland, Italy and Sweden.

As the issue moves towards Asia, Biju Varkkey (Indian Institute of Management Ahmedabad) and Rupa Korde (Flame University) summarise the current status and future prospects of the minimum wage debate in India, which was one of the first Asian countries to enact minimum wage legislation. Despite the country’s high growth rates, it still tackles multiple challenges regarding workers’ protection. In India, minimum wages are set at the national level, but states have autonomy to set their own minimum wages according to the cost of living and job market. This dual system often leads to confusion on the prevailing rate.

Tony Fang (Memorial University of Newfoundland, University of Toronto, Institute of Labor Economics, and Honorary Dean in the School of Management at Xihua University/China) reflects about the state of minimum wage regulation in China. As a very large and heterogeneous country, setting a single minimum wage would be unfeasible. Therefore, rates are set by local governments. The author explains why China faces a classic economic trade-off: minimum wages can raise the wages of low-wage workers and reduce earnings inequality by raising the wage floors, but at the expense of reducing the probability of employment for these low-wage workers.

Bringing this special edition to a close, Haroon Bhorat (University of Cape Town), Ravi Kanbur (Cornell University) and Benjamin Stanwix (University of Cape Town) provide an overview of the nature and extent of minimum wages in sub-Saharan Africa. The authors explain that understanding of minimum wage policy and its impact in countries of the region is not as mature as it could be, largely because of a lack of crucial data.







Monday, September 17, 2018 - 16:00