The Effects of Minimum Wages on the Labor Market and Income Distribution in Kenya: A CGE Analysis

28 Pages Posted: 9 May 2018 Last revised: 12 Jul 2018

See all articles by Tabitha Mwangi

Tabitha Mwangi

Government of Kenya - Kenya National Bureau of Statistics (KNBS)

Florence Nelima Simiyu

The Technical Uinversity of Kenya

Lulit Mitik Beyene

Institute for Economic and Social Development Research

Albert Onderi

Jomo Kenyatta University of Agriculture and Technology

Date Written: July 1, 2017

Abstract

In Kenya, there has been increased debate on the impact of minimum wage increases and pay disparities between sectors. Long-term differences in earnings across sectors and different regions (urban and rural) are reflected through higher poverty rates in rural areas, especially among wage earners. This study evaluates the effects of minimum wages on labor and its impact on growth. The study uses the single country static model, the PEP-1-1 model and the Social Accounting Matrix for Kenya for the year 2009. The key research questions are to assess the effects of minimum wages on rural or urban area labor markets, labor migration, and income distribution. To achieve this, the study simulates three scenarios: increases in minimum wages for formal workers in urban and rural areas at the same rate of 5%, different rates (10% rural and 5% urban), and a cut in the minimum wages in both regions. The findings indicate that increases in wage fuel the migration of labor from rural to urban areas, and stifles the expansion of the economy. A rise in minimum wages has an overall negative effect on incomes of rural households while benefiting urban households, which contributes to increased inequality. A fall in real minimum wages on the other hand, is supportive of output and employment growth.

Keywords: Minimum wage, labor market, migration, income distribution, CGE

Suggested Citation

Mwangi, Tabitha and Simiyu, Florence Nelima and Beyene, Lulit Mitik and Onderi, Albert, The Effects of Minimum Wages on the Labor Market and Income Distribution in Kenya: A CGE Analysis (July 1, 2017). Partnership for Economic Policy Working Paper No. 2017-22. Available at SSRN: https://ssrn.com/abstract=3159371 or http://dx.doi.org/10.2139/ssrn.3159371

Tabitha Mwangi (Contact Author)

Government of Kenya - Kenya National Bureau of Statistics (KNBS) ( email )

Nairobi
Kenya

Florence Nelima Simiyu

The Technical Uinversity of Kenya ( email )

P.O.Box 52428
Nairobi, Nairobi County 00200
Kenya

Lulit Mitik Beyene

Institute for Economic and Social Development Research ( email )

Addis Ababa
Ethiopia

Albert Onderi

Jomo Kenyatta University of Agriculture and Technology ( email )

P.O. Box 62000
Nairobi, NAIROBI 00200
Kenya

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