## Does a Minimum Wage Help Workers?

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**Canonical URL:** [Does a Minimum Wage Help Workers?](https://www.imf.org/-/media/files/publications/fandd/article/2019/march/does-a-minimum-wage-help-workers-basics.pdf)

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### Overview
- Almost every country has a minimum wage; details vary (universal minimums like France versus differentiated systems like New Zealand and South Africa).
- Minimum wages are typically set by the government and revised periodically in consultation with business and labor organizations.
- Stated objectives: boost incomes, improve welfare of low-end workers, reduce inequality, and promote social inclusiveness.
- Criticism: may disrupt labor markets and there may be better-targeted, less distortionary social assistance alternatives.
- Authors: PIYAPORN SODSRIWIBOON and GABRIEL SROUR.

### Impact on welfare
- Key mechanisms that can blunt or nullify intended welfare gains:
  - Noncompliance by employers (minimum wage laws being "mostly on paper").
  - Envelope payments and underreporting of hours or employment to evade taxes and benefit obligations.
  - Heavy social security and labor taxes that reduce take-home pay from higher nominal wages.
  - Employer offsets: reducing benefits, cutting hours, or laying off workers.
- Finding: If no one receives the minimum or enforcement is weak, increases are irrelevant.

### Impact on employment
- The central debate: potential job losses versus wage gains.
- Theoretical outcomes:
  - Competitive markets: enforced minimums above prevailing wages can lead to layoffs.
  - Noncompetitive/monopsonistic markets: a minimum wage can raise incomes without reducing employment and may increase employment by attracting workers.
- Empirical evidence:
  - Research is mixed and remains contentious; some studies find benefits, others find harm, many are inconclusive.
  - Growing consensus: when set at a moderate level, the employment impact is modestly negative.
  - Recent research generally concludes that the change in employment caused by an increase in the minimum wage is close to zero, though low-skilled and young workers may be more adversely affected.
- Plausible reasons for modest employment effects:
  - At moderate levels, minimum wages represent only a small share of employer total costs.
  - Firms can absorb increases by: reducing nonwage costs, raising prices, boosting productivity, or accepting lower profits.

### Impact on inequality
- Empirical studies:
  - Minimum wage hikes tend to narrow wage disparities as part of broader policy efforts toward significant poverty alleviation.
- Limits and risks:
  - Minimum wages set too high can cause significant job losses and lead to perverse distributional effects (widening inequality as low-income earners lose jobs).
  - Increases can compress the wage structure or prompt firms to raise pay across the board for more productive workers, potentially leaving overall income disparity unchanged.

### What is the appropriate level?
- Few studies directly answer the optimal level question.
- Studies that address it suggest an ideal level between 25 and 50 percent of the average wage.
- Practical guidance:
  - Minimum-wage policies should be calibrated to keep overall wage growth in line with productivity gains.
  - Recommendation to take the minimum-wage-setting process out of politicians' hands and delegate it to independent experts.

### Getting by (key statistics)
- The minimum wage as a percentage of the average wage of full-time workers varies widely by country.
- Note: Data as of 2016. Source: Organisation for Economic Co-operation and Development.
- Chart context: vertical axis labeled (percent) with scale points shown from 0 to 60.

*Finance & Development, March 2019 — “Does a Minimum Wage Help Workers?” by PIYAPORN SODSRIWIBOON and GABRIEL SROUR.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2019/march/does-a-minimum-wage-help-workers-basics.pdf_