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Can a minimum wage increase have an adverse impact on inequality? Evidence from two Latin American economies

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An Erratum to this article was published on 07 March 2008

An Erratum to this article was published on 07 March 2008

An Erratum to this article was published on 07 March 2008

Abstract

This paper uses a semiparametric model to analyze the impact of an increase in the real minimum wage on inequality in Colombia between 1995 and 1999 and in Paraguay between 1993 and 2000–2001. Simulations suggest that if the employment effects of the minimum wage increase are ignored, the underlying policies would contribute to reduce earnings inequality in Colombia and would be inequality neutral in Paraguay. By considering the drop in wages of those who lost their jobs, simulations suggest that in both countries the policy in question would increase earnings inequality under some assumptions about the employment elasticity of the minimum wage and the new level of earnings unemployed workers rely upon. While these findings do not mean that minimum wage increases in LDCs (Less Developed Countries) necessarily have adverse distributional affects, they suggest that minimum wage policy should be implemented with care depending on how sensitive employment is to wage increases.

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Authors and Affiliations

  1. The World Bank, 1818 H street, NW, Mail Stop J 5-506, Washington, DC, 20433, USA

    Diego F. Angel-Urdinola

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  1. Diego F. Angel-Urdinola
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Correspondence to Diego F. Angel-Urdinola.

Additional information

The author acknowledges support from grant P074335 from the Research Support Budget at the World Bank, as well as comments from Dr. Quentin Wodon and Edward Creppy at the World Bank, Professors Phil Cross and Arik Levinson at Georgetown University, participants to the 2002 Mid Western Economics Association Meetings in Chicago, participants to the DECRG Poverty seminar at the World Bank, and two anonymous referees. An earlier version of this paper was prepared as part of the author’s doctoral dissertation at Georgetown University. The views expressed here are those of the author and need not reflect those of the World Bank, its Executive Directors or the countries they represent.

An erratum to this article can be found at http://dx.doi.org/10.1007/s10888-008-9079-y

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Angel-Urdinola, D.F. Can a minimum wage increase have an adverse impact on inequality? Evidence from two Latin American economies. J Econ Inequal 6, 57–71 (2008). https://doi.org/10.1007/s10888-006-9049-1

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  • DOI: https://doi.org/10.1007/s10888-006-9049-1

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