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Is Minimum Wage an Effective Tool to Provide Decent Jobs and Reduce Poverty?

The Experience of Selected Developing Countries

By Catherine Saget

International Labour Organization, December 1, 2001

Increased under-employment in developing countries in the 1980s-1990s has led to a renewed emphasis on labor market rigidities such as minimum wage laws. The renewed focus on labor market regulations resulted from the apparent failure of Keynesian-inspired policies to solve the problem of unemployment. In order to remain competitive in the world market, governments of increasingly open economies took steps to deregulate their labor market in many parts of the developing world. Because of the need to generate foreign exchange for debt servicing, there was pressure to boost the development of the export sector and to decrease labour costs. The necessity of debt servicing also limited public expenditure, including public sector wages as part of the structural adjustment process. While advocates of these reforms drew attention to their benefits in terms of job creation, others feared the adverse effects of deregulation on the development of poverty, both in absolute and relative terms. As a matter of fact, a recent increase in inequality in developing countries is reported by several studies (Cornia, 1999; van der Hoeven, 2000).

To the extent that the slow growth of earnings in the bottom distribution is one cause of the widening dispersion of earnings in these countries, the minimum wage could help to restore the relative situation of some of the lowest-paid workers. The aim of this paper is to explore the effects of changes in the minimum wages on employment and poverty in developing countries. This study, we hope, will help policy makers find more appropriate tools to "integrate the agenda of poverty reduction and decent work."

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