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Minimum‐Wage Effects, Compliance, and Firm Size in a Developing Economy: Evidence from Colombia

Year: 2025

Type: article

Abstract: Minimum‐wage legislation is a standard policy in most developing countries. Nonetheless, the consequences of increases in the minimum‐wage are not conclusive. This paper examines the heterogeneous effects of minimum‐wage, considering the imperfect enforcement of minimum‐wage policy and different compliance levels across the firm sizes and types of workers, analyzing the Colombian case. Our identification strategy uses policy circumstances to set the minimum‐wage associated with arbitrary decisions not explained by the fundamentals determining the minimum‐wage. Using instrumental variable techniques, we show that a 10% increase in the minimum‐wage reduces the employment rate by 1.27 percentage points and 0.70 percentage points in the proportion of hours worked. Consistent with a theoretical model of minimum‐wage policy with imperfect competition and enforcement, the negative minimum‐wage effect is larger in firms with higher levels of compliance—that is, medium‐ and large‐sized firms, and within these, the unskilled workers are the most affected.

Source: The Developing Economies

DOI: 10.1111/deve.12443

Authors: Gustavo A. García, Christian Posso, Salomé Arango

Institutions: Universidad EAFIT, Banco de la República Colombia

Language: English

Topic: Labor market dynamics and wage inequality

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Decent work and economic growth, Peace, justice, and strong institutions, Reduced inequalities, No poverty

Open Access status: bronze

Funder: Escuela Superior Politécnica del Litoral