The Consequences of Legal Minimum Wages in Honduras

Abstract

Minimum wage policies are implemented in most developing countries, so understanding their consequences is critical to determine their effectiveness. This paper studies the impact of minimum wages in Honduras from 2005-2012. In this period, there were annual reforms to multiple minimum wages, a 60% increase, and changes in the number of minimum wages. Using 13 household surveys as repeated cross-sections, I estimate the net effects of minimum wage hikes on compliance, labor market outcomes, and poverty. Results indicate that large employers partially comply with minimum wages but small businesses do not comply. Overall employment rates fall slightly, but labor force composition changes significantly. Higher minimum wages reduce covered (formal) employment and increase uncovered (informal) employment. Formal sector wages increase but rising labor supply in the informal sector leads to a negative net effect on wages. Estimates also show that minimum wages are ineffective to reduce poverty.

Keywords: minimum wages, dual labor markets, compliance, employment, wages, poverty

JEL Classification: J23, J31, J38, J46, J48