Minimum Wages and Social Policy: Lessons from Developing Countries

By Wendy V. Cunningham | Go to book overview

CHAPTER 6
The State: The Minimum Wage
Implications for Public
Expenditures

An increase in the minimum wage affects LAC fiscal accounts. In LAC, the governments employ a large labor force, social assistance payments are tied to the minimum wage, and the minimum is used as an eligibility criterion for participation in public assistance programs in many countries. These factors place a fiscal burden on the governments, thus potentially tempering the impulse to raise the minimum wage, but also restricting the degree to which it can be used as a social protection instrument.1


The Minimum Wage May Have Large Impacts
on the Public Sector Wage Bill

The minimum wage can have a large effect on the government’s wage bill, especially if there are numeraire effects. Simulations for five distinct countries in the Region show that a 20 percent increase in the minimum wage can range from no impact to a very large impact on government accounts (see box 6.1 for a brief description of the methodology).2 Assuming no unemployment effects in the public sector as the minimum wage increases, an increase of 20 percent in the wages of those at the minimum wage will increase the wage bill by up to 7.1 percent (table 6.1). When taking into consideration the numeraire effect that is evident for

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