Minimum Wages, Globalization, and Poverty in Honduras

Abstract

To be competitive in the global economy, some argue that Latin American countries need to reduce or eliminate labour market regulations such as minimum wage legislation because they constrain job creation and hence increase poverty. On the other hand, minimum wage increases can have a direct positive impact on family income and may therefore help to reduce poverty. We take advantage of a complex minimum wage system in a poor country that has been exposed to the forces of globalization to test whether minimum wages are an effective poverty reduction tool in this environment. We find the net effect of minimum wage increases in Honduras is the reduction of extreme poverty, with an elasticity of -0.18, and all poverty, with an elasticity of -0.10 (using the national poverty lines). These results are driven entirely by the effect on workers in large private sector firms, where minimum wage legislation is enforced. Increases in the minimum do not affect the incidence of poverty among workers in sectors where minimum wages are not enforced (small firms) or do not apply (self-employed and public sector). Hence, we show that minimum wages can be used as a poverty reduction tool in the formal sector. However, we do not endorse minimum wages as the best tool as we have not carried out a complete cost-benefit analysis of this policy vis-à-vis others.

Growth, Employment, and Poverty in Latin America

“…However, Honduras had difficulty implementing conditional cash transfers programmes: their impacts were limited and a duality emerged between the domestically directed and the externally financed programmes (Moore 2010). For the subperiod that spans from 2001 to 2004, Gindling and Terrell (2010) also demonstrate that an increase in the minimum wage led to a reduction in poverty. Following the international crisis of 2008, all poverty indicators began an upward trend which led to the vanishing of the improvements observed in the previous years.…”

Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws

“…Specifically, the pioneering work of Ashenfelter and Smith (1979) found compliance rate in the US in 1973 to be around 65% 4 . Non‐compliance is also found to prevail in an accumulating list of developing countries, including, for example, Brazil (Lemos, 2004, 2006), Costa Rica (Gindling and Terrell, 1995), Honduras (Gindling and Terrell, 2006), Indonesia (Harrison and Scorse, 2004), Mexico (Bell, 1997), Peru (Baanante, 2005), Trinidad and Tobago (Strobl and Walsh, 2001), and a selection of Latin American countries (Maloney and Nunez, 2004). 5 Evidently, not only is it the case that compliant and non‐compliant employers co‐exist, there are also broad ranges of non‐compliance, which come typically in the form of a spike at the official minimum, alongside a dispersion of subminimum wages in covered sectors 6…”

Does increasing the minimum wage reduce poverty in developing countries?

“…For example, in Honduras, where multiple minimum wages mean that one worker in the household could face a higher minimum wage than another, higher minimum wages only reduce household poverty if the minimum wage affects the household head [10].…”