Minimum wages in Nicaragua

Should a poor country adopt minimum wages? On the one hand, such legislation could increase welfare of employed workers by giving higher wages, and it could lead to higher paying jobs. On the other hand, underemployment is often severe in such economies, and you want to give jobs even to those with low marginal productivity to give them a chance. Also, imposing minimum wages increases the size of the informal sector and thus shrinks the tax base and potentially worsens working conditions. And you can probably imagine other consequences of imposing or not minimum wages in poor countries.

Enrique Alaniz, Thomas Gindling and Katherine Terrell try to make sense of all this for Nicaragua. They have at their disposal household and individual panel data that allows to trace employment and income across minimum wage changes. As the minimum wage is relatively high compared to average wages, the impact of changes should be easier to notice than elsewhere. They find no evidence that an increase in the minimum wage increases wages for those beyond the vicinity of that minimum wage, and it reduces formal employment (elasticity of 0.5). This decrease in employment comes partly from reduced hiring, partly from layoffs, and those result typically in unpaid family work (and thus switch to the informal sector). However, an increase in the minimum wage improves the probability of a household to transition out of poverty, especially if the head of household is affected, as he is less likely to lose his job. Getting people out of poverty is what matters most, so minimum wages appear to be a good policy, at least in Nicaragua.