The impact of minimum wages on wages, work and poverty in Nicaragua

Type Journal Article
Title The impact of minimum wages on wages, work and poverty in Nicaragua
Publication (Day/Month/Year) 2009
In this paper we use an individual- and household-level panel data set to study the impact of changes in legal minimum wages on a host of labor 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. Wefind 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: i.e., increases in the legal minimum wage lead to significant increases in the wages and decreases in employment of privatecovered sector workers who have wages within 20% of the minimum wage before the change, buthave no significant impact on wages in other parts of the distribution. The estimates from the employment transition equations suggest that the decrease in covered private sector employmentis due to a combination of layoffs and reductions in hiring. Most workers who lose their jobs inthe covered private sector as a result of higher legal minimum wages leave the labor force or gointo unpaid family work; a smaller proportion find work in the public sector. We find no evidencethat these workers become unemployed. Our analysis of the relationship between the minimum wage and household income finds: a) theminimum wage is set fairly low relative to the poverty line; it is above the per capita extremepoverty line but below the poverty line for one individual and substantially below the poverty linefor a family with more than one member, (b) increases in legal minimum wages increase the probability that a poor worker’s family will move out of poverty, and c) increases in legalminimum wages are more likely to reduce the incidence of poverty and improve the transitionfrom poor to non-poor if they impact the head of the household rather than the non-head; this isbecause the head of the household is less likely than a non-head to lose his/her job from aminimum wage increase and because those heads that do lose their jobs are more likely to go to another paying job than non-heads who lose their jobs from a minimum wage increase (non-headsare more likely to go into unpaid family work or leave the labor force)

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