Chapter 7: Monitoring the effects of minimum wages

7.4 Effects on employment

Employment effects are controversial

Monitoring the employment effects of minimum wages is essential. Employment effects have long been at the centre of minimum wage research, with much debate over whether and how minimum wages affect jobs, employee numbers and hours worked. As highlighted by Belman and Wolfson, “support for the minimum wage is premised on its improving the lives of those most vulnerable in the labour market. If a minimum wage leads to job loss for many of those same people, serious questions arise with respect to its relative benefits and costs”.1

Debates on employment effects are also frequently controversial, with different economic theories leading to different predictions. According to one view, minimum wages increase the cost of labour above the marginal productivity of low-paid workers and thus prices them out of the market. Other theories consider that up to a certain level, the cost of minimum wages can be absorbed through a combination of lower wage increases for more highly paid workers, lower profit margins, higher productivity, and/or lower employee turnover. Keynesian macroeconomics suggests that employment may increase if minimum wages lead to higher domestic consumption and aggregate demand. 

Empirical evidence

Empirical findings are varied, country- and time-specific, and also depend to some extent on the type of data and methods that are used.

In high-income countries, a comprehensive reviews of about 70 studies, shows that estimates range between large negative employment effects to small positive effects. But the most frequent finding is that employment effects are close to zero and too small to be observable in aggregate employment or unemployment statistics1. Similar conclusions emerge from meta-studies (quantitative studies of studies) in the United States2 , the United Kingdom3 , and in developed economies in general4. Other reviews conclude that employment effects are less benign and that minimum wages reduce employment opportunities for less-skilled workers 5.

Although there are fewer studies in developing countries, similarly mixed findings emerge.67 A recent World Bank publication concluded that “although the range of estimates from the literature varies considerably, the emerging trend in the literature is that the effects of minimum wages on employment are usually small or insignificant (and in some cases positive).”8  One review of studies in ten major economies (Brazil, Chile, China, Colombia, India, Indonesia, Mexico, the Russian Federation, South Africa and Turkey), found small or no impact on employment, except in circumstances where the minimum wage is set at very high levels.9 A review of experiences in Latin America also concludes that employment effects of minimum wage increases are varied and depend on the level.10

1 Belman D; Wolfson, P. 2014. What does the minimum wage do?, W.E. Upjohn Institute for Employment Research, Kalamazoo, Michigan, p.21
2 Doucouliagos, H.; Stanley, T.D. 2009. “Publication selection bias in minimum wage research? A meta-regression analysis” in British Journal of Industrial Relations, Vol. 47, No. 2, pp.406-426.
3 Leonard, M.; Stanley, T.D.; Doucouliagos, H. 2014. “Does the UK minimum wage reduce employment? A meta-regression analysis” in British Journal of Industrial Relations, Vol.52, No.3, pp.499-520.
4 Belman and Wolfson, 2014. Op.cit.
5 Neumark, D., and W Wascher, 2008. Minimum Wages, MIT Press, Cambridge, Massachusetts and London, England.
6 Belman D. and P. Wolfson, (2016) “What Does the Minimum Wage Do in Developing Countries? A Review of Studies and Methodologies", ILO Geneva.
7 Betcherman, G. 2014, “Labor Market regulations: What Do We Know about Their Impacts in Developing Countries?” The World Bank Research Observer
8 Kuddo, A., Robalino, D., and M. Weber, 2015. Balancing Regulations to Promote Jobs: From employment contracts to unemployment benefits, World Bank Group, Washington, D.C.,
9 Broecke, Forti and Vandeweyer (forthcoming), “The Effect of Minimum Wages on Employment in Emerging Economies: A Literature Review” OECD Social, Employment and Migration Working Paper, forthcoming 
10 See Mario D. Velasquez Pinto, forthcoming,