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Contents Introduction

This study assesses the efficiency of minimum wage policy as a tool of poverty reduction in a developing country. To do this we draw on recent studies that use simulations that take into account both who benefits and who pays for the wage increase using household-level data. On the benefits side, we assume that the increases in minimum wages in 2003 boost the incomes of families with at least one minimum or low wage worker. On the cost side, we assume producers pass on the full increase in wage costs to consumers through higher final prices. Generally, a minimum wage policy is ‘pro-poor’ (and hence a well ‘targeted’ policy) if it has a disproportionately positive effect on the incomes of poor households compared with other income groups. Our simulation results indicate that minimum wage legislation is not an effective target antipoverty instrument. Only about 17 percent of the additional earnings from the minimum wage hike in 2003 flow to poor households, another 34 percent of the benefits flow to the near-poor, while half of the benefits accrue to nonpoor households. Moreover, the examination of net benefits reveals that only one in four poor households gain through higher incomes, while three out of four poor households lose through higher prices.