Minimum Wages and Enforcement Effects on Employment in Developing Countries

Abstract

I provide an analysis of the effects of minimum wages in developing countries using the enforcement of the law as a plausible explanation of the heterogeneous effects on employment across these countries. I construct a reliable indicator for the degree of enforcement by reading and organizing the labor codes of 82 developing countries and quantifying penalties and degree of enforcement. I interact minimum wage changes with the degree of enforcement (grouped in none, weak, and strong enforcement) and estimate minimum wage effects in different enforcement settings. My main results are that minimum wage has adverse effects on total employment (elasticity -0.0166) in countries with strong enforcement (i.e., with costly penalties), especially on female workers (elasticity -0.0172). The negative effect is significantly different between countries with no enforcement and countries with strong enforcement. These results are sharper when I interact with a measurement of the quality of the enforcement.

Keywords: enforcement of the law, labor demand, minimum wages, public policy

JEL Classification: J33, J38