Effects of Minimum Wage Policy on Poverty in Argentina

Bachelorarbeit von Stefan Legge

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 the statutory minimum wage dramatically from 200 pesos in 2003 to 1,240 pesos six years later.

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Chapter 2.1,General Theory of Minimum Wages:

One of the first and most cited articles about minimum wages was written by George Stigler in 1946. He describes the divergent effects in competitive and monopsonistic labor markets. In the competitive case, the market clearing wage is efficient and cannot be improved. A minimum wage will either reduce employment or - if it is below the equilibrium wage - will have no employment effect. On the other hand, in a monopsonistic labor market, the equilibrium wage is below the efficient 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.

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 effect of a minimum wage on the uncovered sector: If some workers lose their jobs in the formal sector and begin offering 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 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 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 than the uncovered sector.