The Impact of Minimum Wages in Mexico and Colombia

September 1995
Comparative data from Mexico and Colombia are used to analyze the impact of minimum wages. In Mexico, low levels of compliance and ineffective levels of minimum wages imply negligible employment effects. In Colombia, where the minimum wage is closer to the average wage in the formal sector, the minimum wage has a significant impact on employment.
There are diverging views about how minimum wages affect labor markets in developing countries.
Advocates of minimum wages hold that they redistribute resources in a welfare-enhancing way, and can thus reduce poverty, improve productivity, and foster growth. Opponents, on the other hand, contend that minimum wage interventions result in a misallocation of labor and lead to depressed wages in the very sectors --- the rural and informal urban sectors --- where most of the poor are found, with the effect of wasting resources and reducing the growth rate.
Data from Colombia and Mexico for the 1980s provide an opportunity to evaluate the impact of minimum wages. In Mexico in the 1980s, the minimum wage fell in real terms roughly 45 percent. By 1990, Mexico's minimum wage was about 13 percent of the average unskilled manufacturing wage.
During the same period, the minimum wage in Colombia increased at nearly the same rate, reaching roughly 53 percent of the average unskilled wage.
Bell charts how the mandated minimum wage affected the demand for skilled and unskilled labor in both countries during that decade. She finds:
° In Mexico, minimum wages have had virtually no effect on wages or employment in the formal sector. The main reason: the minimum wage is not an effective wage for most firms or workers. In the informal sector, in turn, there is considerable noncompliance with the mandated minimum wage, especially among part-time and female workers. As a result, significant numbers of workers are paid at or below minimum wages.
° In Colombia, minimum wages have a much stronger impact on wages, judging from their proximity to the average wage and both cross-section and time series estimates. The estimates imply that the elasticity of low-paid unskilled employment with respect to minimum wages is in the range of 2 to 12 percent.
This paper --- a product of the Poverty and Human Resources Division, Policy Research Department --- is part of a larger effort in the department to analyze the implications of labor market distortions. The study was funded by the Bank's Research Support Budget under the research project The Impact of Labor Market Policies and Institutions on Economic Performance (RPO 678-46).