Publication: Implications of Minimum Wage Increases on Labor Market Dynamics: Lessons for Emerging Economies
Loading...
Published
2017-04
ISSN
Date
2017-04-26
Author(s)
Pabon, Laura M.
Editor(s)
Abstract
This paper offers evidence on the relationship between the minimum wage and unemployment and informal employment, and identifies some of the lessons learned on the potential effects of increasing the minimum wage. Most of the evidence suggests that sizable increases in the minimum wage are likely to exacerbate unemployment and the prevalence of informal employment, which could have negative consequences for labor productivity and businesses as a result of reduced investment in employee training and loss of productive workers. This outcome occurs when businesses adopt the main channels available for absorbing increased labor costs. The majority of the empirical evidence suggests that the effects of minimum wage increases on unemployment and the demand for labor are unclear. The outcome depends in large part on the specific characteristics of the labor markets and the degree of compliance with the minimum wage law. Most of those affected by minimum wage increases are less qualified workers. In Latin American and Asia, differences in the effects of minimum wage increases depend largely on the size and type of firms. In countries with high levels of informal employment, minimum wage increases can increase informal employment, since the formal workers who lose their jobs are absorbed by the informal sector of the economy. In general, businesses have five mechanisms for absorbing the added labor costs. Given the characteristics of the labor market in emerging economies, it is likely that businesses faced with increased labor costs will resort to less than optimal channels, which will tend to affect their productivity and the labor market in general.
Link to Data Set
Citation
“Pabon, Laura M.; Del Carpio, Ximena V.. 2017. Implications of Minimum Wage Increases on Labor Market Dynamics: Lessons for Emerging Economies. Policy Research Working Paper;No. 8030. © World Bank. http://hdl.handle.net/10986/26468 License: CC BY 3.0 IGO.”
Digital Object Identifier
Associated URLs
Associated content
Other publications in this report series
Publication The Macroeconomic Implications of Climate Change Impacts and Adaptation Options(Washington, DC: World Bank, 2025-05-29)Estimating the macroeconomic implications of climate change impacts and adaptation options is a topic of intense research. This paper presents a framework in the World Bank's macrostructural model to assess climate-related damages. This approach has been used in many Country Climate and Development Reports, a World Bank diagnostic that identifies priorities to ensure continued development in spite of climate change and climate policy objectives. The methodology captures a set of impact channels through which climate change affects the economy by (1) connecting a set of biophysical models to the macroeconomic model and (2) exploring a set of development and climate scenarios. The paper summarizes the results for five countries, highlighting the sources and magnitudes of their vulnerability --- with estimated gross domestic product losses in 2050 exceeding 10 percent of gross domestic product in some countries and scenarios, although only a small set of impact channels is included. The paper also presents estimates of the macroeconomic gains from sector-level adaptation interventions, considering their upfront costs and avoided climate impacts and finding significant net gross domestic product gains from adaptation opportunities identified in the Country Climate and Development Reports. Finally, the paper discusses the limits of current modeling approaches, and their complementarity with empirical approaches based on historical data series. The integrated modeling approach proposed in this paper can inform policymakers as they make proactive decisions on climate change adaptation and resilience.Publication South Africa’s Fragmented Cities: The Unequal Burden of Labor Market Frictions(Washington, DC: World Bank, 2026-01-08)Using high-resolution administrative, census, and satellite data, this paper shows that South African cities are characterized by spatial mismatches between where people live and where jobs are located, relative to 20 global peers. Areas within 5 kilometers of commercial centers have 9,300 fewer residents per square kilometer than expected, which is 60 percent below the global median. Poor, dense neighborhoods are most affected. In Johannesburg, a 10-percentile increase in distance from the nearest business hub corresponds to a 3.7-percentile drop in asset wealth (a proxy of household wellbeing) and 4.9-percentile drop in employment. In Cape Town, the declines are 4.0 and 3.7 percentiles, respectively. Employment is 87 percent lower in the poorest decile than the richest in Johannesburg and 61 percent lower in Cape Town. These findings suggest that South Africa’s spatial organization of people and economic activity constrains agglomeration and reinforces inequality. This methodology provides a scalable and standardized data-driven framework to analyze spatial accessibility and agglomeration frictions in complex, data-constrained urban systems.Publication The Evolution of Local Participatory Democracy in Nepal(Washington, DC: World Bank, 2025-11-05)Nepal is, according to its constitution, among the world’s most decentralized countries, with a long and complex tradition of local-level public participation. This paper traces the evolution of Nepal’s modern participatory institutions, examining the extent to which they are “induced” by external interventions versus being “organically” rooted in indigenous practices. The paper identifies three broad phases: an initial focus on participation in project implementation; a subsequent phase that expanded citizen engagement; and a third phase of citizen empowerment, culminating in the 2015 federal constitution, which granted unprecedented local autonomy. The analysis yields five key findings. First, over the past 50 years, successive reforms have progressively expanded opportunities for citizens to influence local decision-making. Second, these reforms have integrated traditional participatory mechanisms into formal institutions of local government. Third, although central-level initiatives exist, most participatory platforms continue to operate at the local level. Fourth, the federal constitution has created a new landscape of local democracy, embedding autonomy and accountability. Fifth, although they are still valued in many ethnic and territorial communities, traditional participatory practices are gradually disappearing. The paper concludes by offering policy recommendations to help donor agencies and governments strengthen Nepal’s democratic trajectory. It argues that effective interventions should build on Nepal’s deep participatory traditions while recognizing the constitutional reality of far-reaching local autonomy.Publication Institutional Capacity for Policy Implementation: An Analytical Framework(Washington, DC: World Bank, 2026-01-07)State capacity is an important prerequisite for policy implementation, yet at the country level it is difficult to measure, assess, and reform. This paper proposes a focus on institutional capacity: the ability of public institutions to implement the specific policy mandates for which they are responsible. Based on a review of existing literature, the paper defines the different dimensions that compose institutional capacity and groups them into two cross-cutting categories: organizational dimensions (personnel, financial resources, information systems, and management practices) and governance dimensions (transparency, independence, and accountability). The paper proposes measures for organizational and governance dimensions using existing data, shows intra-institutional variation of these measures within countries, and discusses how new data could be collected for better measurement of these concepts. Finally, the paper illustrates how the framework can be used to diagnose the sources of common problems related to weak policy implementation.Publication Closing the Gender Gap in Entrepreneurship: Overcoming Challenges in Law and Practice for Female Entrepreneurs(Washington, DC: World Bank, 2026-01-07)Despite significant strides toward gender equality, women around the world continue to encounter systemic obstacles that hinder their entrepreneurial success. This paper systematically reviews the literature on the barriers female entrepreneurs face and the solutions proposed to overcome these challenges. It discusses institutional factors, financial factors, human capital factors, and social and cultural factors. The literature overview is complemented by a series of stylized facts that illustrate how overcoming some of these existing barriers is correlated with improved women’s entrepreneurship and female labor force participation, drawing on the World Bank’s Women, Business and the Law database as well as the World Bank’s Enterprise Surveys. The findings underscore the need for creating an enabling environment where women can thrive as entrepreneurs.
Journal
Journal Volume
Journal Issue
Collections
Related items
Showing items related by metadata.
Publication Minimum Wage Policy : Lessons with a Focus on the ASEAN Region(World Bank, Washington, DC, 2014-01)This report consists of seven chapters and is divided into three parts. Part one focuses on the minimum wage policy, its historical evolution, and the current institutional context across ASEAN countries. Part two delves into the socio?economic impacts of the minimum wage policy on workers, households, firms, the economy, and the ASEAN region. Part III links the findings from each country to the ASEAN regional context and brings all the analysis together into a policy and operational discussion. Specifically, part one of the report includes this chapter (chapter one) and chapter two. The rest of chapter one summarizes the findings from all chapters in the report and presents an overview of lessons detailed in the final chapter. To provide some background and context for the remainder of the report, chapter two briefly describes the history of minimum wage policy around the world and the theoretical principles behind wage setting and its effects. Part two consists of four chapters. Chapter three, which describes how the minimum wage policy is structured and managed in each ASEAN country, includes details on the objectives that countries have set out for the policy and how the policy is enforced in each country. Chapter four summarizes results from primary and secondary empirical research on the impacts of minimum wage changes on employment, wages, and informal work in the four focus ASEAN countries. The discussion in this chapter takes into account the existence of complementary worker protection programs in each country. Chapter five discusses empirical results on whether changes in the minimum wage policy affect poverty and inequality. Since each country has distinct poverty programs, the discussion takes into account the presence of various social programs that potentially complement income earned from wage labor. Chapter six focuses on how wage and labor costs affect firms, especially in terms of investment decisions and productivity. Due to the limited availability of evidence on the impact of minimum wages on firm performance and private sector activity in ASEAN countries, a large part of the discussion in this chapter includes evidence from non-ASEAN countries. Lastly, this chapter reviews the status of the main labor market institutions legislated in the region and provides some evidence on how other labor institutions might interact with the minimum wage policy to shape its effect. Part three comprises chapter seven, which reflects on the material presented in previous chapters and provides policy?oriented insights. It discusses the political economy of the minimum wage policy and draws out the implications of having such diverse wage policies and institutional arrangements for wage management in an increasingly interlinked regional bloc such as ASEAN. The chapter also synthesizes the lessons learned throughout the report and frames the main labor policy issues to provide guidance for, and elicit action from, policymakers going forward.Publication Does the Minimum Wage Affect Employment? Evidence from the Manufacturing Sector in Indonesia(World Bank, Washington, DC, 2012-07)Using survey data from the Indonesian manufacturing industry, this paper investigates the impact of minimum wage on employment and wages offered by Indonesian manufacturing firms from 1993 to 2006. It shows that the estimated effects of minimum wage on employment are positive within a province (i.e., with province fixed effects), but negative within a firm (i.e., with firm fixed effects), indicating the importance of using firm panel data to reduce the endogeneity bias in estimates. It finds significant heterogeneous effects of minimum-wage changes on employment. The employment effects of minimum wages are significant and negative among small firms and less educated workers, but not among large firms and workers with high school education and above. The negative employment impact is more severe for non-production workers than for production workers. The analysis also shows that the minimum wage disproportionally affects women: most of the non-production job losses are experienced by female workers. Lastly, the paper finds that the minimum wage is more correlated with the average wage of small firms than that of large firms, suggesting that minimum wages are more binding in small firms.Publication Wage Subsidy and Labor Market Flexibility in South Africa(2009-03-01)In this paper, the authors use a highly disaggregate general equilibrium model to analyze the feasibility of a wage subsidy to unskilled workers in South Africa, isolating and estimating its potential employment effects and fiscal cost. They capture the structural characteristics of the labor market with several labor categories and substitution possibilities, linking the economy-wide results on relative prices, wages, and employment to a micro-simulation model with occupational choice probabilities in order to investigate the poverty and distributional consequences of the policy. The impact of a wage subsidy on employment, poverty, and inequality in South Africa depends greatly on the elasticities of substitution of factors of production, being very minimal if unskilled and skilled labor are complements in production. The desired results are attainable only if there is sufficient flexibility in the labor market. Although the impact in a low case scenario can be improved by supporting policies that relax the skill constraint and increase the production capacity of the economy especially towards labor-intensive sectors, the gains from a wage subsidy are still modest if the labor market remains very rigid.Publication Ex-ante Evaluation of the Impact of Increases in Minimum Wages on Labor Market Outcomes in Kosovo(World Bank, Washington, DC, 2020-08)This paper uses microsimulation techniques to quantify the potential ex-ante impacts of several minimum wage increases on labor market outcomes in Kosovo. The results show that the overall impacts of a minimum wage increase in the baseline scenario are likely to be modest, although the impacts for some groups may be stronger. In the most extreme scenario, an increase to 250 euros per month, the simulated unemployment rate increases by 0.4 percentage point in the short term and about 0.6 percentage point in the long term. The youth unemployment rate (ages 15-24) is anticipated to increase by up to 1.1 percentage points in this scenario, a relatively large increase considering the already high levels of unemployment among this group. Similarly, unemployment among the unskilled (with primary school or less) is simulated to increase by 0.6 percentage point in the short term and up to 0.8 percentage point in the long term. The paper finds that, even if raising the minimum wage is long overdue, due to decreasing nominal wages in real terms, policy needs to strike a fine balance between protecting workers and ensuring that employment effects are not too large.Publication Minimum Wage Policy : Lessons with a Focus on the ASEAN Region(Washington, DC, 2013-07-30)As developing economies continue to mature and enter the next phase of reforms, labor market issues and key policy instruments such as the minimum wage increasingly come to the forefront. Increased globalization and wider competition compel countries to make labor markets more flexible so as not to hurt competitiveness. At the same time, policymakers face pressure to rethink labor market regulations (and social safety nets) to avoid disadvantaging workers, especially the most vulnerable who are more prone to employment insecurity. Evidence of the impact of minimum wage policies in the East Asian context and in Association of South East Asian Nations (ASEAN) countries, more specifically remains very limited. A thorough literature search identified only a few rigorous studies of the impact of minimum wages on important welfare outcomes in ASEAN countries, and some of the evidence was narrowly focused on one sector and period or from a time when the institutional setup and management of the policy was different from today. Given the relevance of the minimum wage policy in ASEAN economies, which are experiencing rapid economic growth accompanied by rising income inequality and persistent poverty among unskilled workers, having this evidence seems critical. The objective of this report is to contribute to the ongoing (and renewed) debate on the use of minimum wage policy as a tool for addressing various socioeconomic issues. It assumes minimum wages will remain in place, and the analysis seeks to address knowledge gaps on the policy's effects on worker outcomes and firm performance in order to provide guidance to policymakers in ASEAN countries (and similar contexts) on how to best manage the policy. This report consists of seven chapters and is divided into three parts. Part one focuses on the minimum wage policy, its historical evolution, and the current institutional context across ASEAN countries. Part two delves into the socio-economic impacts of the minimum wage policy on workers, households, firms, the economy, and the ASEAN region. Part three links the findings from each country to the ASEAN regional context and brings all the analysis together into a policy and operational discussion.
Users also downloaded
Showing related downloaded files
No results found.