Role of minimum wages in rebalancing the economy

Abstract

Minimum wages can be a powerful tool for supporting decent work goals and can be a crucial complement to the strengthening of social protection floors and poverty alleviation efforts. This tool has become even more relevant as many of these countries need to boost domestic sources of growth in order to counteract the weakening of exports to crisis-hit advanced economies. Rising minimum wages can help to rebalance sources of growth even with limited fiscal space. This chapter shows that, for the above benefits to be reaped in the context of the present crisis minimum wage systems need to be well designed. First, the coverage of minimum wage systems should be improved. Second, the level of minimum wages should be carefully considered. Third, good design can help to support the goal of improving incomes in the informal economy and reducing wage inequality. Fourth, empirical analysis suggests that the direct effect of minimum wages on employment levels in developing countries has tended to be small or insignificant.