Minimum Wage: Does it Improve Welfare in Thailand?

• Published date: 01 June 2019
• Author: Ximena V. del Carpio,Julián Messina,Anna Sanz‐de‐Galdeano
• Date: 01 June 2019
• DOI: http://doi.org/10.1111/roiw.12360

MINIMUM WAGE: DOES IT IMPROVE WELFARE IN THAILAND?

by Ximena V. del Carpio

World Bank

Juli

an Messina

Inter-American Development Bank; IZA Institute of Labor Economics

and

Anna Sanz-de-Galdeano*

Universidad de Alicante; IZA Institute of Labor Economics

We studythe causal impact of the minimum wage on labor market outcomes, household consumption,

inequality and poverty in Thailand by relyingon policy variation in minimum wages over time across

provinces.We find that minimum-wage increases havea large and significant impact on the likelihood

of working in the uncovered sector among workers with elementary education. However, the impact is

very small and insignificant among other labor market groups. In contrast, the minimum wage has

large positive effects on the formal sector wagesof low-earning workers, such as the young, elderly and

low educated. Increases in the minimum wage are associatedwith reductions in household poverty and

consumption inequality at the bottom half ofthe distribution.

JEL Codes: J31, D31

Keywords: employment, inequality, minimum wage, poverty, uncovered sector

1. Introduction

The minimum wage constitutes a key labor market policy instrument in both

developed and developing countries. In developing countries, where tax bases are

limited and hence resourcesfor other labor market policies (e.g., active labor mar-

ket policies) are scarce, minimum wages are used even more often with an objec-

tive of lifting the fortunes of low-skilled workers and poor individuals. But do

minimum-wage increases actually help them escape poverty? The answer to this

question largely depends on the labor market impacts of the minimum wage

across different types of workers.

We would like to thank Kirida Bhaopichitr, John Giles, Lars Sondergaard, and seminar partici-

pants at the World Bank in Thailand for helpful comments. The authors would like to thank the

National Economic and Social Development Board of Thailand and World Bank colleagues for

providing critical data inputs. This research was sponsored by the World Bank under contract

7800772 and the Development Research Funds. The opinions expressed in this article do not neces-

sarily reflect the views of the World Bank or the Inter-American Development Bank. The authors

declare that they have no relevant or material financial interests that relate to the research described

in this paper. Sanz-de-Galdeano gratefully acknowledges financial support from the Spanish Minis-

try of Economy and Competitiveness Grant ECO2014-58434-P

*Correspondence to: Anna Sanz-de-Galdeano. Universityof Alicante. Carretera de San Vicente

s/n. 03080 San Vicente-Alicante, Spain, (anna.sdg@ua.es).

1

DOI: 10.1111/roiw.12360

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C2018 International Association for Research in Income and Wealth

In developed countries the academic debate has focused on the employment

effects of the minimum wage. Although there is broad consensus on the positive

impact of the minimum wage on average wages, its effects on employment are still

heatedly debated. Some authors argue that the standard competitive analysis of

the minimum wage, which predicts disemployment effects, is at odds with the evi-

dence, which shows few signs of increased joblessness after minimum-wage

increases in developed countries (see for instance Card and Krueger, 1995; Dick-

ens et al., 1999; Dolton, Bondibene and Stops, 2015). Importantly, there are other

theories that do not unambiguously predict disemployment effects of the mini-

mum wage. As Stigler (1946) argued in his seminal article on minimum wages,

when employers have the power to set wages, a skillfully set minimum wage can

actually increase employment. Minimum wage increases may also encourage

firms to sponsor training for their workers (Acemoglu and Pishke, 1999) or stimu-

late workers to upgrade their skills to avoid unemployment (Cahuc and Michel,

1996). Such investments enhance growth and thus employment. Other authors,

including Neumark and Wascher (2008), argue that the literature tilts in favor of

those studies that find a negative employment effect.

In developing countries, the study of the employment effects of the minimum

wage is complicated by those countries large uncovered sectors and frequent

non-compliance with labor policy.

1

Considerable evidence gathered in Latin

America yields nonuniform conclusions (as surveyed by Cunningham, 2007).

Large negative effects of minimum wage increases on formal employment are

found in Honduras (Gindling and Terrell, 2009), while effects are small in Costa

Rica (Gindling and Terrell, 2007) and Colombia (Maloney and N

u~

nez, 2004) and

not statistically significant in Mexico (Bell, 1997) and Brazil (Lemos, 2009).

Much less is known about other developing regions such as Southeast Asia, with

the notable exception there of Indonesia, for which various studies have found

small negative employment effects after minimum-wage spikes (Rama, 2001; Ala-

tas and Cameron, 2008; Del Carpio, Nguyen and Wang, 2012). However, despite

decreases in formal employment, average employment rates did not change in

either Indonesia (Comola and de Mello, 2011) or Vietnam (Nguyen, 2010). More

recently, Magruder (2013) has argued that previous empirical studies evaluating

the role of the minimum wage in Indonesia may have been contaminated by meth-

odological (namely, endogeneity) biases, thus making the results less valid. He

uses a difference in spatial differences estimator, which arguably reduces the likeli-

hood of endogeneity biases, and finds that minimum-wage increases boosted

employment and wages in the economic sectors coveredby the policy. Studies on

the minimum wage in developing countries outside Latin America and Asia are

much scarcer, perhaps with the exception of South Africa (Dinkelman and

Ranchhod, 2012; and Bhorat et al., 2013).

The academic focus on how minimum-wage increases affect employment con-

trasts with policy makers emphasis on how minimum-wage legislation would affect

1

The paper uses informal or uncovered sectors interchangeably(versus formal or covered sectors)

to denote sectors in which workers are either not legally subjecttothe minimum wage law, or, despite

being legally subject to the minimum wage legislation, the law is not enforced. See, for instance, the

early contributions of Welch(1974), Mincer (1976), and Gramlich (1976).

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