Chapter 7: Monitoring the effects of minimum wages
7.2 Effects on wages
Minimum wages can benefit minimum-wage earners as well as workers with somewhat higher earningsThe first step in monitoring the effects of a minimum wage is to verify that it really does increase wages. If it does not, then the minimum wage is not an effective wage floor. If it does, then the minimum wage will normally increases average wages and reduce wage inequality compared to a situation where it is absent.
By pushing up the wages of low-paid workers, the minimum wage also contributes to raising the relative wages of more vulnerable or disadvantaged workers, such as those who are young, less educated, or migrant workers.
In practice, minimum wages can benefit two categories of workers.
- Firstly, they should benefit so-called “bound” workers – those who previously earned less than a newly introduced or newly increased minimum wage. This is normally the target group of the policy.
- Secondly, minimum wages can have “ripple” or “spillover” effects further up the wage distribution, increasing wages of those above the level of the minimum. Spillover effects refer to indirect wage increases that take place because employers or workers (or both) want to maintain differences in job status, or higher wages for workers with more seniority or skill. They can also arise in the public sector, when different groups of workers are paid a multiple of the minimum wage. Spillover effects are normally stronger at wages that are close to the minimum, and progressively disappear as workers earn higher wages.
Empirical findings Among advanced economies, the inequality-reducing effect is found in most empirical studies across a wide range of countries and periods.
Belman and Wolfson, in their review of the United States and other developed economies, found that “the preponderance of evidence is that higher minimum wages raise the wages of both bound workers and workers who had previously been earning above but close to the new minimum”.2 In the U.S., for example, about 5 per cent of paid employees earn no more than the applicable state-level minimum wage, but a total of up to 25 per cent (those who earn up to 150 per cent of the minimum) have been estimated to benefit from the policy. In France, not taking into account spillover effects, it was estimated that the wages of about 11 per cent of workers increased as a result of the minimum wage increase in January 2015.3
Among developing economies, there is similar evidence that minimum wages can reduce wage inequality. The reactivation of minimum wages has, for example, reduced wage inequality in Brazil.4 But in many countries, their effectiveness in doing so is reduced by widespread non-compliance. In some cases, minimum wages appear to only reduce wage inequality in the formal sector.
The size of the effect on wages and wage inequality thus differs across countries and depends – among other factors - on the level at which the minimum wage is set, the number of workers it covers, the extent of the “spillover” effect, and the degree of compliance.
- Grimshaw and Miozzo (2003) Minimum wages and pay equity in Latin America Working Paper 12/2003, ILO, Geneva.
- Rubery (2003) Pay Equity, minimum wage and equality at work Working Paper 19/2003, ILO, Geneva.
1 Neumark D.; Wascher, W.L. 2013. Minimum Wages, The MIT Press, Cambridge, Massachusetts, London, England, p. 138.
2 Belman D.; Wolfson, P. 2014. What does the minimum wage do?, W.E. Upjohn Institute for Employment Research, Kalamazoo, Michigan.
3 DARES, La Revalorisation du SMIC au 1er Janvier 2015, Octobre 2015, No.077
4Lemos, S. 2010. Minimum wage in Brazil: The effect of the minimum wage on wages, employment, and prices in Brazil (Great Britain, Marston Gate). Belman and Wolfson, 2015.