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.