Effects of Minimum Wage Policy on Poverty in Argentina

Legge, Stefan

Effects of Minimum Wage Policy on Poverty in Argentina

Zusammenfassung

Inhaltsangabe:Introduction:
In 1886, when New Zealand passed the New Zealand Industrial Conciliation and Arbitration Act it was the first modern country to enact a minimum wage. Half a century later on June 25, 1938, US-President Franklin D. Roosevelt signed into law America's first minimum wage: 25 cents an hour. Since that time minimum wages are a frequent topic of international economic science. Many economists have discussed the question whether or not a statutory wage floor is a useful tool for achieving social goals. Especially the Chicago School of Economics and its representatives like Milton Friedman or George Stigler rejected minimum wage policies. They were supported by ordoliberal economists like Walter Eucken or Friedrich Hayek. On the other side, supporters of Keynesian theories have often been in favor of statutory wage floors.
For a long time most economists restricted research about the impact of minimum wages to its employment effects in industrial countries. By doing that, there was an astonishing accordance that the effects are insignificant if the minimum wage is low and employment-reducing if it is above a certain threshold. But in the last twenty years, there has been a new discussion about whether or not this result can be proved with recent data and new econometric methods. Especially the study by Card and Krueger in 1994 called the negative employment effects into question.
However, minimum wages are not intended to stimulate employment but to increase the welfare of poor workers. Therefore, economic research should focus on the welfare effects of institutional wage floors. This includes employment and price effects as well as the impact on human capital accumulation. In other words, analyses about minimum wages must comprise a couple of indicators for welfare. Another weak point of minimum wage research is its focus on industrial countries. There is little evidence about minimum wages' impact on poverty in developing or emerging economies. Since a large share of the population in poor countries still suffers from enormous destitution and minimum wages are intended to alleviate poverty, it is of great interest whether or not this goal has be achieved.
Argentina is an upper-middle income country and experienced a severe economic crisis in 2001/2002 with a dramatic downfall of the GDP. Since then the country has rebounded and poverty rates have decreased substantially. At the same time, the Argentine government raised […]

Leseprobe

Inhaltsverzeichnis

Stefan Legge

Effects of Minimum Wage Policy on Poverty in Argentina

ISBN: 978-3-8366-2984-3

Herstellung: Diplomica® Verlag GmbH, Hamburg, 2009

Zugl. Universität Mannheim, Mannheim, Deutschland, Bachelorarbeit, 2009

Dieses Werk ist urheberrechtlich geschützt. Die dadurch begründeten Rechte,

insbesondere die der Übersetzung, des Nachdrucks, des Vortrags, der Entnahme von

Abbildungen und Tabellen, der Funksendung, der Mikroverfilmung oder der

Vervielfältigung auf anderen Wegen und der Speicherung in Datenverarbeitungsanlagen,

bleiben, auch bei nur auszugsweiser Verwertung, vorbehalten. Eine Vervielfältigung

dieses Werkes oder von Teilen dieses Werkes ist auch im Einzelfall nur in den Grenzen

der gesetzlichen Bestimmungen des Urheberrechtsgesetzes der Bundesrepublik

Deutschland in der jeweils geltenden Fassung zulässig. Sie ist grundsätzlich

vergütungspflichtig. Zuwiderhandlungen unterliegen den Strafbestimmungen des

Urheberrechtes.

Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in

diesem Werk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme,

dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei

zu betrachten wären und daher von jedermann benutzt werden dürften.

Die Informationen in diesem Werk wurden mit Sorgfalt erarbeitet. Dennoch können

Fehler nicht vollständig ausgeschlossen werden und der Verlag, die Autoren oder

Übersetzer übernehmen keine juristische Verantwortung oder irgendeine Haftung für evtl.

verbliebene fehlerhafte Angaben und deren Folgen.

http://www.diplomica.de, Hamburg 2009

Effects of Minimum Wage Policy

on Poverty in Argentina

Page I

Contents

1 Introduction

1.1 Research Puzzle and Relevance of the Topic . . . . . . . . . . . . . . . . .

1.2 Objective and Structure of the Bachelor's Thesis . . . . . . . . . . . . . . .

2 Literature

2.1 General Theory of Minimum Wages . . . . . . . . . . . . . . . . . . . . . .

2.2 Minimum Wages in Industrial Countries . . . . . . . . . . . . . . . . . . .

2.3 Minimum Wages in Developing Countries . . . . . . . . . . . . . . . . . . .

2.4 Pros and Cons of Minimum Wages . . . . . . . . . . . . . . . . . . . . . .

3 Minimum Wages in Argentina

3.1 Economic Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

3.2 Minimum Wage Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

4 Econometric Methods

4.1 Wage Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

4.2 Kaitz Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

4.3 Meyer-Wise Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

4.4 Regression Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

4.5 Dierence in Dierence Estimation . . . . . . . . . . . . . . . . . . . . . . 18

5 Empirical Analysis

5.1 Dataset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

5.2 Descriptive Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5.3 Research Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

5.4 Expectations and Hypotheses . . . . . . . . . . . . . . . . . . . . . . . . . 23

5.5 Empirical Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

5.6 Problems and Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . 27

5.7 Comparison with other Articles . . . . . . . . . . . . . . . . . . . . . . . . 28

6 Conclusion

Bibliography

A Appendix Part I - Tables

B Appendix Part II - Figures

xvi

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 1

1 Introduction

1.1 Research Puzzle and Relevance of the Topic

In 1886, when New Zealand passed the "New Zealand Industrial Conciliation and Arbi-

tration Act" it was the rst modern country to enact a minimum wage. Half a century

later on June 25, 1938, US-President Franklin D. Roosevelt signed into law America's rst

minimum wage: 25 cents an hour. Since that time minimum wages are a frequent topic of

international economic science. Many economists have dicussed the question whether or

not a statutory wage oor is a useful tool for achieving social goals. Especially the Chicago

School of Economics and its representatives like Milton Friedman or George Stigler re-

jected minimum wage policies. They were supported by ordoliberal economists like Walter

Eucken or Friedrich Hayek. On the other side, supporters of Keynesian theories have often

been in favor of statutory wage oors.

For a long time most economists restricted research about the impcat of minimum wages

to its employment eects in industrial countries (Neumark et al. 2004, p.138). By doing

that, there was an astonishing accordance that the eects are insignicant if the minimum

wage is low and employment-reducing if it is above a certain threshold. But in the last

twenty years, there has been a new discussion about whether or not this result can be

proved with recent data and new econometric methods. Especially the study by Card and

Krueger in 1994 called the negative employment eects into question.

However, minimum wages are not intended to stimulate employment but to increase the

welfare of poor workers. Therefore, economic research should focus on the welfare eects

of institutional wage oors. This includes employment and price eects as well as the im-

pact on human capital accumulation. In other words, analyses about minimum wages must

comprise a couple of indicators for welfare. Another weak point of minimum wage research

is its focus on industrial countries. There is little evidence about minimum wages' impact

on poverty in developing or emerging economies. Since a large share of the population in

poor countries still suers from enormous destitution and minimum wages are intended

to alleviate poverty, it is of great interest whether or not this goal has be achieved.

Argentina is an upper-middle income country and experienced a severe economic crisis in

2001/2002 with a dramatic downfall of the GDP. Since then the country has rebounded

and poverty rates have decreased substantially. At the same time, the Argentine govern-

ment raised the statutory minimum wage dramatically from 200 pesos in 2003 to 1,240

pesos six years later.

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 2

1.2 Objective and Structure of the Bachelor's Thesis

This research paper deals with the minimum wage policy in Argentina from 2003-2006.

The attempt is made to nd out whether minimum wages helped to reduce poverty or if

they slowed down economic upturn by increasing for example the rate of unemployment.

The time period after the severe crisis in 2001/2002 with a downfall of the GDP by about

15 per cent was characterized by a rebound in GDP. The rate of unemployment fell from

about 17% to less than 10% while the share of employed adults increased by ve percent-

age points to 55%. In the same period, the national minimum wage had been raised from

200 pesos in 2003 to 800 pesos in 2006. Even if we take account of the ination rate which

reached an average of about 10% a year, the minimum wage was increased by about one

hundred per cent in real terms.

The rst aim of the present bachelor's thesis is to present the manifold eects of minimum

wages in general and to discuss the problem of the joint presence of losers and gainers

from minimum wage increases: On the one hand some workers receive higher wages but

on the other hand some may lose their jobs. A second goal of my research paper is to

present and compare dierent econometric methods used to analyze the eects of min-

imum wages. And nally, the third objective is to examine the eects of the enormous

rise of the minimum wage in Argentina between 2003 and 2006. Thereby it is of interest

whether or not minimum wage policy helped to reduce poverty.

The structure of the bachelor's thesis is as follows: In the next chapter, I briey summa-

rize a couple of interesting research papers starting from Stigler 1946 to Khamis 2008.

This includes a discussion of the pros and cons of minimum wage policy. My intention is to

point out that the supporters of minimum wages describe specic goals and research should

focus on the question whether or not these goals, for example improving the situation of

poor workers, can be achieved. In the following chapter, I present general information

about the economic situation in Argentina as well as about the Argentine minimum wage

policy from 2003 till 2006. Chapter four presents and discusses several econometric meth-

ods used to analyze the economic impact of minimum wages. The fth chapter starts with

presenting the dataset for Argentina and a discussion of the problems of household surveys.

Then my empirical ndings for the economic eects of the Argentine minimum wage pol-

icy are presented. A nal chapter will summarize the ndings of the present bachelor's

thesis.

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 3

2 Literature

Since Argentina is neither an industrial nor a developing country, this chapter briey

discusses a couple of studies about minimum wages in general as well as in rich and poor

nations. I will only present the main points of several research papers to equip the reader

with almost all important aspects about minimum wages.

2.1 General Theory of Minimum Wages

One of the rst and most cited articles about minimum wages was written by George

Stigler in 1946. He describes the divergent eects in competitive and monopsonistic labor

markets. In the competitive case, the market clearing wage is ecient and cannot be im-

proved. A minimum wage will either reduce employment or - if it is below the equilibrium

wage - will have no employment eect. On the other hand, in a monopsonistic labor mar-

ket, the equilibrium wage is below the ecient level and an appropriately set minimum

can increase welfare. Stigler stresses the word 'appropriately' with the sentence:

A uniform national minimum wage, infrequently changed, is wholly unsuited

to these diversities of conditions. (Stigler 1946, p. 361)

In addition, Stigler argues that minimum wage policy might not help those it is intended to

help. This may be the case if low-wage members of wealthier households, such as teenagers,

get higher wages at the expense of the displaced underclass workers. Furthermore, Stigler

discusses what might be the eect of a minimum wage on the uncovered sector: If some

workers lose their jobs in the formal sector and begin oering labor in the shadow economy,

the wages in the informal sector may fall. To sum up, Stigler asserts that minimum wages

are an inappropriate tool for helping poor people because its many economic distortions.

For this reason he is in favor of subsidizing low incomes if the society thinks that the

workers deserve a higher remuneration.

This neoclassical view of minimum wages has been the standard economic theory for

several decades and is still taught in introductory courses. Nonetheless, a lot of economists

generated more complex models and discussed other aspects of minimum wages. Deepak

Lal (1995) discusses and summarizes some of the main new arguments against and in favor

of minimum wage legislation. He presents for example a study by Harry Johnson (1969)

who argues that wages in the uncovered sector do not necessarily fall with an increase of

the minimum wage. This may be the case if the formal sector is more capital-intensive

Referring to "these conditions", Stigler argues that the appropriate minimum wage must vary with

occupation as well as the quality of worker, among rms and through time (p.361).

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 4

than the uncovered sector.

In addition, the measured rate of unemployment may rise because some workers of the

uncovered sector begin oering work after an increase of the minimum wage. That is to

say, some workers start oering work in the formal sector and before they nd a job,

they are observed as unemployed. Deepak Lal presents another study that was written

by Machin and Manning (1994). The two economists argue that there is some kind of a

'dynamic monopsony' justifying minimum wages that is similar to 'traditional monopsony'

but dierent in one dening aspect:

The implicit assumption underlying this approach is that workers have imper-

fect information about the job opportunities oered by dierent employers.

[...] In contrast to traditional monopsony, modern monopsony is likely to be

relevant in labour markets where there are many small employers since infor-

mation about job opportunities is likely to be less easy to nd out than in

a labour market dominated by a few large employers. (Machin and Manning

1994, p.320)

Despite this appealing theory, Machin and Manning do not nd convincing empirical

evidence for the existence of a 'dynamic monopsony'. Deepak Lal gives another argument

against minimum wages. He points out that a minimum wage may compress the wage

distribution and thereby reducing wage dierentials. Although this is one goal of minimum

wage supporters this compression may destroy incentives to accumulate human capital.

Empirical evidence for the negative impact on human capital accumulation is found by

Hashimoto, Leighton and Mincer (see Lal 1995 p.27).

The impact of minimum wages on the distribution of income has also been analyzed by

several other economists. While classical economic theory argues that a minimum wage

destroys all jobs below that wage, the empirical evidence seems to be dierent. The OECD

stated in its Employment Outlook 1998:

Spikes tend to appear at the new minimum wage, indicating that many of

those previously earning below the new minimum wage now earn exactly that

amount. This suggests that minimum wages can be eective in achieving one

of its equity goals of ensuring that fair wages are paid to workers. There is also

some evidence of spillover eects that lead to an increase in wages for those

previously at or just above the new minimum. (OECD 1998, pp.31-32)

And the European Commission agrees in 2005 by saying that "the higher the minimum

wage as a proportion of the average wage, the more compressed is the bottom of the

Deepak Lal also explains the functional chain: "With the minimum wage, if the demand for the capital-

intensive covered sector's output was fairly elastic, its employment and output would tend to fall. This

would release not only labour but also capital for use in the labour-intensive industry but, ex hypothesi, in

proportions which would increase the overall capital intensity and hence wages in the uncovered sector."

(Deepak Lal, 1995, p.15)

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 5

earnings distribution" (European Commission 2005, p.180).

Richard Freeman (1996) discusses the redistributive eects and analyzes under what con-

ditions a minimum wage policy can reach its goal to reduce poverty. From his point of

view, an optimal minimum wage must balance the risk of job loss and the gain through

reduced poverty. He concludes that "as part of an artfully designed package of economic

measures, an appropriately set minimum has the potential to do more good than harm"

(p. 648). In addition, he claries that minimum wage policy is not intended to "increase

national output or the rate of productivity. It redistributes income" (p. 648). But Freeman

is also of the opinion that it takes more than just an institutional wage oor to establish

a working social system that eectively reduces destitution.

The fact that employment eects are not the only aspect of relevance is highlighted by

Sara Lemons (2004a). In her text, she argues that many economists ignore the minimum's

impact on prices. If a government raises the minimum wage and some workers have to

receive higher wages as a result, the companies face increased labor costs. In this case

they have three options to respond: increase prices of sale, reduce employment or down-

size prot. It can be assumed that most employers will try to simply pass the higher costs

down to the consumers and Lemons says:

Standard economic theory is not hurt if wage increases do not cause employ-

ment decrease but cause price increases. (Lemons 2004b, p.6)

Then, the consumers of these products pay for the minimum wage increase. Sara Lemons

(2004b) analyzes this aspect in a second article with data from Brazil and nds evidence for

price eects of minimum wages. In addition, she claims that low income groups are aected

stronger by this ination than rich people. So, as already mentioned in the introductory

chapter, minimum wages are a strong interference in the price system of a market economy.

Therefore, it is not surprising that there are several eects as a result of minimum wage

policies. Economists have to consider all these eects when they try to answer the question

whether or not wage oors are useful tools.

Ghatak et al. (2006) discuss another interesting aspect that is noteworthy. If a higher

minimum wage increases the average wage for dependent personal work, less people try

their luck as entrepreneurs. And those potential employers that face the ghost of a chance

are most likely to become salaried workers instead of set up a company. Therefore, the

average quality of employers may be improved and credits can become cheaper. As a

result, companies may expand and hire new workers. This functional chain may be very

hypothetical but demonstrates the far reaching eects of minimum wage policies.

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 6

2.2 Minimum Wages in Industrial Countries

Most empirical studies about the impact of minimum wages that were published before

1990 found negative employment eects. But in the 1990s, a couple of research papers

questioned this classical view and especially a study by Card and Krueger (1994) caused

a stir. The authors analyze the eect of a minimum wage increase in New Jersey on

employment in the fast-food industry. Methodically, they compare the development of

employment in New Jersey and the neighboring state of Pennsylvania where the mini-

mum is unchanged. The result that there were no negative eects was contradictory to

the economic wisdom at that time.

Insofar, it should not be surprising that many other

economists criticized the study. David Henderson (1996) for example complains about the

data used by Card and Krueger and refers to a research paper by Neumark and Wascher

(1992). These economists actually nd disemployment eects with other data on the New

Jersey fast-food industry.

The discussion about whether minimum wages have negative eects inspired Addison and

Blackburn (1998) to analyze the US minimum wage policy from 1984-1997. In their study,

the two authors focus on the question whether or not the minimum reduced poverty rates

of three dierent groups: teenagers, young adults and junior-high dropouts. The inter-

esting result is that Addison and Blackburn nd evidence for a poverty-reducing eect

only in the 1990s but not in the 1980s. After discussing several possible explanations for

this outcome, the authors assert that they "are not sure of an explanation for why the

minimum wage impacts appear to have such dierent eects in the 1990s than in the

1980s" (p.18). Neither the macroeconomic situation nor statistical artifacts can explain

the divergent impact. But this result highlights how dicult it is to estimate the minimum

wage's eect.

To complete this section, two comprehensive studies by Neumark and Wascher will be

presented. In 2004, they analyzed the employment eects of minimum wages with a

cross-section time-series data set comprising 17 OECD-countries for the period 1975-2000.

The results generally provide evidence for the classical thesis that minimum wage increases

cause job losses. In particular, Neumark and Wascher examine under what circumstances

the eects are strong or weak. If a government combines a minimum wage increase with

active labor market policies, employment protection laws and a subminimum wage for

young workers, the statutory wage oor may have a weak impact. On the other hand,

high union coverage and restrictive labor standards strengthen the negative employment

eects. Another very interesting nding presented in this study is that the disemployment

eects of minimum wages are strongest in countries with little labor market regulations.

Whether or not this implies that a minimum wage increase will strongly inuence the

One aspect that has rarely been noticed is that Card and Krueger also found that prices of fast-food

meals increased in New Jersey relative to Pennsylvania. This contradicts the assumption that New

Jersey's fast food industry is monopsonistic.

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 7

informal sector, is analyzed by Melanie Khamis (2008). We will have a look at this paper

in the next section.

First, another even more extensive survey by Neumark and Wascher (2007) should be

mentioned. This study summarizes and discusses almost all studies about minimum wages

from 1990 till 2006, the so called "new minimum wage research". Because of the large vol-

ume, only the main result is of interest for this bacherlor's thesis. Neumark and Wascher

conclude that there are only a few analyses which provide evidence for positive employ-

ment eects for the whole economy rather than for a small industry. On the other hand,

they nd that "the preponderance of the evidence points to disemployment eects" and

these "seem especially strong" for the least-skilled groups (p.121).

2.3 Minimum Wages in Developing Countries

Comparing with the huge volume of literature about the eects of minimum wages in

industrial nations, there are only a few studies about the impact in developing coun-

tries. Nonetheless, there are some very interesting papers that point out that the eects

may be dierent, especially if one considers the dierences between industrial and de-

veloping economies. A perfect example for this is the text by Basu and Felkey (2008).

The two authors create an eciency wage model with community-based income sharing

and show that even in competitive labor markets a minimum wage can increase employ-

ment. This contradicts the classical theory represented among others by George Stigler

(1946). The dierent result occurs because of a small but realistic change in the assump-

tions - namely that people do not use all their income for their own consumption. This

demonstrates how fragile the simple classical view actually is.

Another aspect of developing economies that varies from industrial nations is the large

informal sector. A couple of studies analyze how this inuences the eects of minimum

wage policy. The typical question is how eective a direct intervention into the wage distri-

bution can be if the labor market is divided into a formal and an informal sector. In their

article, Basu, Chau and Kanbur (2007) discuss exactly this question. They analyze why

many governments turn a blind eye to non-compliance with minimum wages. In fact, a

model with imperfect competition, enforcement and commitment can explain for example

the joint presence of compliant and non-compliant employers or why many workers receive

exactly the minimum wage. The authors especially stress the aspect that economists must

not simply assume perfect enforcement but have to consider that governments may 'turn

a blind eye' to non-compliant companies (p.25).

A further text dealing with the eects of minimum wage policy on the informal sector of

an economy was published by Melanie Khamis in 2008. She analyzes data from Argentina

and nds support for the thesis that workers in the uncovered sector may experience

stronger eects than those in the formal sector. More interesting, her results show that

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 8

wages of informal employees were raised after a minimum wage increase. This paradoxical

nding contradicts the two-sector-model created by Harris and Todaro (1970). In this

model, at rst a minimum wage reduces employment in the formal sector. Then the dis-

placed workers migrate to the informal sector and nally the increased labor supply in the

uncovered sector lowers the wages in this sector. Melanie Khamis explains her divergent

result by pointing out that workers see the minimum as a reference wage and employers

accordingly pay this wage to avoid unmotivated employees. But on the other hand, they

do not pay for social security contribution.

A major issue in many developing countries is the problem of child labor. Many economists

argue that parents send their children to work solely because their own incomes are too

small to nourish the family. Therefore, some politicians see minimum wages as a tool for

ghting child labor. They argue that if parents receive higher incomes they will send their

children to school instead of work places. Kaushik Basu (2000) analyzes whether or not

minimum wage policy can eectively reduce child labor. At rst, he explains that a general

increase in the labor incomes of poor adults will in fact lower the dimension of child labor.

But the attempt to articially raise the adult's incomes by increasing the minimum wage

seems to deteriorate rather than improve the situation. If some parents lose their jobs

after the minimum wage increase, their dependence on their children's income is boosted.

As a result the degree of child labor may increase as Basu writes:

Therefore, the suggestion of using a minimum wage legislation in developing

countries as a form of international labour standard has the risk of exacerbat-

ing the problem of child labour. (Basu 2000, p.60)

A study by Neumark, Cunningham and Siga (2006) explicitly analyzes the impact of

minimum wages on poor families' incomes. The authors use a "before-and-after" research

design to nd out whether or not the minimum wage policy in Brazil raised remunerations

of poor families. With a dataset from 1982-2002 they do not nd any positive eects of

minimum wages on the distribution of incomes. In other words, the minimum fails to

achieve its primary goal. In addition, the authors nd that evidence suggests "the opposite

eect of reducing family incomes in the lower tail of the distribution" (p.158).

2.4 Pros and Cons of Minimum Wages

This section is intended to summarize, contrast and weigh up the main arguments in favor

as well as against minimum wage legislation.

As Guy Standing (1995) lists, advocates adduce several arguments. The rst and most

important reason for minimum wages is that they should alleviate, prevent and reduce

poverty. But since unemployed persons do not receive a wage, the minimum can only help

those who actually have a job and suer from 'sweating'. That is to say, the minimum

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 9

wage can help those workers that are forced to work excessively long in order to achieve

a minimal subsistence income. In addition, advocates of minimum wage policy underline

that a wage oor will have a demonstration eect and lead to reduced income inequality

and 'fair' earnings. This may be even more important in a labor market that is more and

more based on individual rather than collective contracts or in times when unions are

rather weak.

Another possible eect of minimum wages that has often been stressed is based on ef-

ciency wage theory. If the minimum wage leads to higher wages, poor workers will

be motivated and additionally more productive because they can aord better food,

clothing, training and so on. Standing argues that "this argument is surely correct, but

there are better ways of doing that, including incentive-based payment systems"(p.10).

However, minimum wages may have other positive eects. Lew Kuan Yew, the rst Prime

Minister of the Republic of Singapore raised minimum wages in 1979 by nearly 20 per

cent for three years. His intention was to transform the Singaporean economy into a high-

tech industry by persuading the producers via a minimum wage increase to expedite the

process. But speaking with Findlay and Wellisz (1993), the result was "a substantial in-

crease in unit labor costs, which reduced Singapore's international competitiveness [...]

and contributed to the 1985 recession and to the accompanying decline in manufactured

exports and employment"(p.116).

A further argument for minimum wages is that they are administratively simple and

provide an anchor for social transfers or wage subsidies. A statutory wage oor may for

example reduce windfall gains in case of employers paying to little wages because the

workers receive the rest from the social system. From this point of view, minimum wages

and wage subsidies seem to be congenial tools although they generally contradict each

other. Anyway, a nal argument for minimum wages, as already mentioned, is that in a

monopsonistic labor market, they have positive employment and welfare eects. But this

again raises the question which labor market is in fact monopsonistic and what would be

the appropriate minimum wage.

Since many economists call all these arguments into question, let us briey have a look

at the reasoning of the critics. The main assertion against minimum wages is that they

may have negative employment eects. In this case there will be a joint presence of losers

and gainers from minimum wage increases. On the one hand some workers get a higher

wage but on the other hand some lose their jobs. The question whether or not the prot

exceeds the loss is dicult to answer. But as long as the most deprived workers will face

unemployment it is hard to support minimum wages if the disemployment eects are

predictable. Referring to the studies by Neumark and Wascher, we should be aware of

the risks of minimum wage policy, particularly with regard to the objective of reducing

poverty. If minimum wages carburize destitution of the deprived people, politicians are

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 10

supposed to search for other anti-poverty tools. This argument against minimum wages

is actually enforced by Kaushik Basu (2000). As already shown, he argued that in devel-

oping countries an institutional wage oor has the risk of increasing the degree of child

labor.

A very interesting aspect of minimum wages is their impact on human capital accumula-

tion. While advocates argue that minimum wages increase productivity, this seems to be

doubtful. If for example young people face a higher wage because of the statutory wage

oor, they might break up school and start working. In the long run, this loss of human

capital would have strong negative eects on an economy's welfare. The question whether

or not minimum wages lower the number of disciples is controversial

. In almost the same

manner contended is the eect of minimum wages on the so called on-the-job training.

Some economists like Neumark and Wascher (1998) argue that the compression of the

wage distribution weakens the incentive to accumulate human capital.

Another more fundamental-theoretical reasoning against state interventions into the price

system of a market economy stems from monetarists and libertarians like Milton Friedman

or Friedrich August von Hayek as well as from proponents of the so called social market

economy. These economists claim that the free price system is one of the big advantages

of the free market over the command economy. In fact, every price in a market economy

comprises more information than any social planner, any organization or any government

can ever have. If the state inuences the prices via taxes or minimum wages, there will be

enormous distortions. Therefore, the proponents of the social market economy argue that

the state must use market-based instruments to achieve social goals. And minimum wages

are not part of these instruments because they represent an inecient, direct intrusion

into the price system.

Given these theoretical ambiguities and the huge number of contradictory arguments,

it is not surprising that empirical evidence is needed. But when we look at the empirical

studies about minimum wages we nd almost exclusively research about the employment

eects. One reason for this may be that only if minimum wages cause job losses, the

joint presence of gainers and losers exists. If there are no such disemployment eects, the

workers seem to be either better o or at the same level as before. But referring to Sara

Lemons (2004a and 2004b) we should not forget about the price eects or the impact

on human capital accumulation and long-term economic growth. Insofar, evaluating the

question whether or not minimum wages are eective tools for achieving the objective of

helping the poor requires a look at a large number of dierent macroeconomic indicators.

see for example Card (1992a and 1993b), Katz and Krueger (1992) or Card and Krueger (1994) in

contrast to Neumark and Wascher (1992, 1994b, 1995a) or Currie and Fallick (1993)

Effects of Minimum Wage Policy

on Poverty in Argentina

Page 11

3 Minimum Wages in Argentina

3.1 Economic Situation

One hundred years ago, Argentina was one of the wealthiest countries in the world.

But starting with the Great Depression in 1930, politicians turned to more protectionist

policies and Argentina recovered slowly from the worldwide economic downturn. In the

second half of the 20th century, the country experienced several up-and-down movements.

Especially the many military conicts caused economic downturns. In 1982, the defeat by

the British in the Falklands War removed the military regime and Raúl Alfonsin consol-

idated democratic institutions. But he failed to resolve economic problems and in 1989,

record foreign debt interest payments, tax evasion and capital ight resulted in a cur-

rency crisis that shocked the country with hyperination. The 1990s were determined by

market-oriented policies and a peso-dollar xing. After some successful years this mon-

etary link-up caused another deationary crisis in 1998 and 1999. The new government

under President Fernando de la Rúa was not capable to solve the problems and in 2001,

the Minister for Economic Aairs was forced to freeze all bank accounts. This caused a

storm of protest, a downfall of the GDP by about 15 per cent as well as high levels of un-

employment and poverty. After two years of economic collapse, Néstor Kirchner won the

chaotic presidential election and since 2003 the Argentine economy has grown by about

nine per cent per year. The rates of unemployment and poverty declined gradually.

Today, Argentina is classied as an 'Upper-Middle Income Country' or as a secondary

emerging market by the World Bank. With $338.7 billion it has the 31st largest nominal

gross domestic product in the world and is even on place 23 if we consider purchasing

power. In the ranking of GDP at purchasing power parity per capita, with about $14.000

Argentina is ranked 57th on average and therefore comparable to countries like Mexico

or Turkey. Another possibly more accurate measurement for welfare is the UN Human

Development Index. Based on data from 2006, Argentina is ranked 46th in the complete

list and second in Latin America.

Argentina's economy benets from abundant natural resources, an export-oriented agri-

cultural sector and a relatively diversied industrial base. The population is well-educated

as the high literacy rate of 97 per cent indicates. The country is one of the world's major

agricultural producers and primary production accounts for about 10 per cent of GDP

and almost one third of all exports. The most important sector is the diversied service

sector which accounts for about 60 per cent of GDP. Since 2002 the telecommunications

sector has expanded dramatically and nowadays more than 75 per cent of the population

has a mobile telephone and 16 million Argentines are online.

Details

Seiten
Erscheinungsform: Originalausgabe
Erscheinungsjahr: 2009
ISBN (eBook): 9783836629843
DOI: 10.3239/9783836629843
Dateigröße: 3.7 MB
Sprache: Englisch
Institution / Hochschule: Universität Mannheim – Volkswirtschaftslehre
Erscheinungsdatum: 2009 (Mai)
Note: 1,7
Schlagworte: minimum wage mindeslohn poverty argentina policy
Produktsicherheit: Diplom.de

Autor

Stefan Legge (Autor:in)

Effects of Minimum Wage Policy on Poverty in Argentina

Zusammenfassung

Leseprobe

Inhaltsverzeichnis

Details

Autor

Stefan Legge (Autor:in)