Fixing Minimum Wage Levels in Developing Countries: Common Failures and Remedies

By Saget, Catherine | International Labour Review, January 1, 2008 | Go to article overview

Fixing Minimum Wage Levels in Developing Countries: Common Failures and Remedies


Saget, Catherine, International Labour Review


Abstract.

Some developing countries have set their minimum wages too high or too low to constitute a meaningful constraint on employers. The article compares minimum wages worldwide, proposes several ways of measuring them in developing countries and discusses whether they are effective thresholds in those countries. The second part of the article considers the institutional factors leading countries to set minimum wages at extreme levels. The author concludes that the minimum wage is used as a policy instrument to several ends - wage negotiation, deflation and social dialogue - which results in the absence of a wage floor, weak collective bargaining, or non-compliance.

In the political economy of minimum wage setting, the debate about minimum wages among mainstream labour economists typically opposes two points of view. The first is that a judiciously set minimum wage can make a modest contribution to meeting social goals, without much distortion of employment patterns; and the second, that the best policy is to leave wage setting entirely to supply and demand (and, maybe, to collective bargaining), without any recourse to legislation or other regulatory measures to establish a minimum wage. This article will not engage in that debate (as it would require at least a book!): it adopts the former view (Saget, 2001). Working from that perspective, the article shows that a considerable number of countries set minimum wages at levels that seem either far too low or far too high to be considered reasonable. Having documented these anomalies, it then analyses why such policy choices emerged in those countries.

This article proposes several measures of the minimum wage in developing countries, i.e. in a context where the quality of indicators of productivity and average wage can be questioned. By using data from more than 130 transition, industrialized and developing countries, this article presents a comprehensive overview of minimum wage levels worldwide. It shows that in a sizeable number of countries, the minimum wage is so low in the wage structure that it is not, or hardly, a constraint for enterprises ("mini minimum wage"). These countries are mainly located in the former Soviet Union, Africa and, to a lesser extent, Latin America. The article also shows that the situation is quite the opposite in other countries located in Asia, and also Latin America and Africa, where the minimum wage appears to be very high in the wage distribution. In these countries, the article argues, the minimum wage is in fact too high to be considered as a genuine minimum wage. This situation is labelled "maxi minimum wage".1 Finally, in the intermediate group of countries, the minimum wage is set at levels, which, although they may differ greatly from one country to another, seem to correspond more closely to the definition of minimum wage.

The article shows, on the one hand, that in many countries there is a link between the minimum wage and the level of public-sector wages, pensions and social benefits. It also documents how price stabilization policies have relied on the minimum wage. All of these factors are explored to explain "mini minimum wage" situations. The article also shows, on the other hand, that in some countries, minimum wage legislation amounts to average wage fixation. It also shows that poorly developed collective bargaining is a driving factor behind the emergence of "maxi minimum wages": if minimum wage consultations are the only forum where trade unions can make their demands known, there is a danger that the resulting minimum wage is not a genuine threshold, but rather the actual wage earned by most formal workers.

Thus, the article demonstrates that countries are trying to pursue multiple goals with a single policy instrument. Governments have used the minimum wage as a reference to fix wages and incomes, as a deflator tool and as a means of promoting social dialogue. The result has been trouble. …

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