The complexity of 'minimum wage' effect on employment

Debates on minimum wage are one of the oldest. Proponents argue that every worker should get certain minimum wage. The rationale is rooted both in ethics and correcting the monopolistic markets. Opponents argue that setting minimum wage is an external disruption to the market equilibrium. The firms would shut down because they won't be able to pay the wages, decreasing employment. It would then hurt the very poor.

David Card, showed for the first time, in 1990s that minimum wage laws in US (for that level) didn't reduce employment. This was a revolutionary finding at that time. Subsequently, literature on minimum wage in developed countries supported this finding.

However, the effects of minimum wages in developing countries is not well researched. A recent paper on the effects of minimum wage in Honduras suggests that it did have negative effect on employment.

In Indian context, MNREGS is a kind of minimum wage law. It sets wage floor, providing bargaining power to workers. Employers have to essentially give more wage than MNREGS wages in order to recruit workers and retain them. The General Equilibrium effect of MNREGS show that it didn't distort employment.

The story in developing countries is thus complex. It gets more complex if one considers sub sectors. Consider the case of budget private schools in India. Teachers in these schools are paid around Rs.4,000 to Rs.5,000. It's the affordable wage for the employers, for the amount of fee they collect. Let's say that the minimum wage is fixed at Rs.15,000 and if it is strictly enforced, the schools have to either shut down or increase their fee by three times. Either way it would hurt the students.

It would be great if minimum wage research should also looks into sector wide effects (may be it's already done but I am not aware). The solutions aren't obvious to me though. Differential minimum wages as per sectors is an obvious idea but it's not practical. May be we should just leave it there thinking that lack of implementation of policies is some times a boon!

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