Minimum Wages, Globalization and Poverty in Honduras

35 Pages Posted: 9 Jan 2007

See all articles by T. H. Gindling

T. H. Gindling

University of Maryland, Baltimore County; IZA Institute of Labor Economics

Katherine Terrell

Stephen M. Ross School of Business at the University of Michigan; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics; Gerald R. Ford School of Public Policy

Date Written: December 2006

Abstract

To be competitive in the global economy, some argue that Latin American countries need to reduce or eliminate labor market regulations such as minimum wage legislation because they constrain job creation and hence increase poverty. On the other hand, minimum wage increases can have a direct positive impact on family income and may therefore help to reduce poverty. We take advantage of a complex minimum wage system in a poor country that has been exposed to the forces of globalization to test whether minimum wages are an effective poverty reduction tool in this environment. We find that minimum wage increases in Honduras reduce extreme poverty, with an elasticity of -0.18, and all poverty, with an elasticity of -0.10 (using the national poverty lines). These results are driven entirely by the effect on workers in large private sector firms, where minimum wage legislation is enforced. Increases in the minimum do not affect the incidence of poverty in sectors where minimum wages are not enforced (small firms) or do not apply (self-employed and public sector).

Keywords: minimum wage, poverty, Central America, Honduras

JEL Classification: J23, J31, J38

Suggested Citation

Gindling, Thomas and Terrell, Katherine, Minimum Wages, Globalization and Poverty in Honduras (December 2006). IZA Discussion Paper No. 2497, Available at SSRN: https://ssrn.com/abstract=955813

Thomas Gindling

University of Maryland, Baltimore County ( email )

1000 Hilltop Circle
Baltimore, MD 21250
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Katherine Terrell (Contact Author)

Stephen M. Ross School of Business at the University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Gerald R. Ford School of Public Policy ( email )

735 South State Street, Weill Hall
Ann Arbor, MI 48109
United States

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