The Inter-American Dialogue’s Daily Latin America Advisor

Would Higher Minimum Wages Benefit Latin Americans?

Editor's Note: In an interview with Inter-American Dialogue's Latin America Advisor, Guillermo Vuletin discusses minimum wage policies in Latin America. Read the full Q&A here.

What is the basic rationale behind the suggested increase in the minimum wages in Latin America? Extensive research in the United States and other advanced countries suggests that a modest raise in the minimum wage increases earnings of low-income families, reducing poverty and income inequality without jeopardizing employment. This last element is undoubtedly key to assessing the effect on poverty and income inequality. If an increase in the minimum wage led to higher unemployment, the implications for society would be less obvious. Would higher minimum wages bring similar desired results in terms of reduction in poverty and income inequality in Latin America? Generally speaking, not likely. The level of informal economic activity in Latin America ranges between 25 and 60 percent. This unfortunate fact is the result of a multidimensional and explosive mix. Broadly speaking, the region still suffers from poor rule of law and high levels of corruption. These chronic illnesses create a wedge between labor laws and actual labor conditions. In this context, an increase in the minimum wage may be innocuous at best, or more likely, shift workers to the informal economy.

Moreover, as a consequence of the disassociation between laws and actual practice, several Latin American countries have minimum wages to average income ratios that are fairly high by international standards.

Consequently, poverty and income inequality may remain unchanged or even worsen. Naturally, the expected outcome would be completely different if some progress was also achieved on the institutional front. Moreover, as a consequence of the disassociation between laws and actual practice, several Latin American countries have minimum wages to average income ratios that are fairly high by international standards. For example, in Paraguay, that ratio is above 100 percent (that is, the minimum wage is higher than the average income). Not surprisingly, these countries are among those with the highest levels of informal economic activity. While increases in minimum wages are an important policy tool to help alleviate poverty and income inequality, they require some institutional quality prerequisites to actually work. The region still has a deficit in this regard and urgently needs to make huge progress on this front.