Minimum wage compliance in Latin America

The weight of economic and institutional factors

Andrés MarinakisILO – Santiago

marinakisa@ilo.org

Minimum wages through time

• Minimum wages have been introduced in the region a long time ago;

• Through the decades, MWs have been suffering the impact of economic crises (high inflation, fiscal adjustments, competitive devaluations, etc.);

• Since early 2000, real MWs benefited from sustained economic growth;

• In practice, periodic adjustments follow certain inertia, forgetting the main objective of MWs.

Two main criteria to evaluate the effectiveness of MWs• Minimum wage and basic needs

– Minimum wage in relation to the poverty line

– Minimum wage in relation to the minimum living wage

• Minimum wage compliance– Estimate non-compliance on the basis of

household surveys

MW as a proportion of urban poverty line, 2011

Méx

ico

Boliv

ia (E

st. Pl

ur. d

e)

Repúb

lica D

omin

icana

Nicarag

ua

Urugu

ay

El Salv

ador

Brasil

Perú

Parag

uay

Colom

bia

Ecuad

or

Hondu

rasChi

le

Costa

Rica

Pana

má0

0.5

1

1.5

2

2.5

3

Note: poverty line per person, ECLAC

MW in relation to rural poverty line, 2011

Repúb

lica D

omin

icana

Méx

ico

El Salv

ador

Nicarag

ua

Boliv

ia (E

st. Pl

ur. d

e)

Urugu

ayBras

ilPe

rú

Hondu

ras

Pana

má

Parag

uay

Chile

Costa

Rica

Ecuad

or

Colom

bia

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Note: poverty line per person, ECLAC

Minimum living wage

Definition: income required for an average household (considering size and employed members) to reach the poverty line

poverty line x size of householdemployees per household

MW in relation to the minimum living wage, 2011

Méx

ico

Venez

uela

(Rep

. Bol

. de)

Repúb

lica D

omin

icana

Boliv

ia (E

st. Pl

ur. d

e)

Nicarag

ua

Urugu

ay

El Salv

ador

Perú

Brasil

Chile

Colom

bia

Parag

uay

Hondu

ras

Pana

má

Costa

Rica

Ecuad

or0

0.2

0.4

0.6

0.8

1

1.2

Total hogares 50 % más pobre

Non-compliance with the MW in private enterprises, 2011

Méx

ico

Boliv

iaBras

ilChi

le

Urugu

ay

Rep. D

omin

icana

Venez

uela

El Salv

ador

Pana

má

Costa

Rica Perú

Colom

bia

Ecuad

or

Parag

uay

Hondu

ras0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Preliminary conclusions on the implementation of MWs

• Despite the important improvement in real MWs of recent years, in many countries the MW is not enough to satisfy the basic needs of workers and their families;

• In some of the countries where the MW is close to satisfying the basic needs there is high level of non-compliance with the MW;

MW in relation to average wage and non-compliance, 2011

20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.00.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

MW/Average wage

Non

com

plia

nce

Minimum wage and non-compliance in urban sector, 2011

20 25 30 35 40 45 50 550

5

10

15

20

25

30

35

MW/Average wage

Non

com

plia

nce

Uruguay Chile

Costa Rica

Peru

%

%

Non-compliance: ¿blame the level or the institutions?• Discussions on MWs usually focus on its level,

forgetting the daily management;• While the level is very important for the MW

to be effective, there is no optimal level, but a reasonable range (avoiding extremes);

• Within that reasonable level, the quality of the institutions in place to enforce the MW will determine the final result in compliance.

Institutions required to promote MW enforcement• General knowledge of rights and obligations• MW as a target of inspection• Labour inspectors trained, with resources• Inspections as a % of establishments• Fines, periodic adjustment, workers affected• Effective application of fines• Length of the whole procedure• Develop adequate administrative registers

A focus on the rural sector

• The impact of MWs in rural areas is limited by lower % of wage employees;

• Non-compliance rates in rural areas is always higher that in urban areas;

• Very weak presence of labour inspection in rural areas;

• Lower unionization rates and collective bargaining.

Final remarks• Most countries LA countries present a gap

between MWs and basic needs and some show high levels of non-compliance;

• Both features weaken impact on poverty;• Gap with basic needs should be progressively

reduced, especially in times of economic growth;• Level of MW is a determinant factor for

compliance;• But institutions set up for promoting and

guaranteeing enforcement are also crucial.

Final remarks• Periodic adjustments tend to concentrate the

bigger efforts of all parties. However, it seems necessary to review the effectiveness of the actual implementation;

• Evidence shows that countries have to review if MWs are satisfying the needs of workers and their families and if their structure is still adequate;

• In addition, they have to revise all the layers of the inspective action.