Inequality, Commodity Prices And Minimum Wages In The Andean Countries

Income inequality decreased in the Andean Countries (AC) by almost seven Gini points in 2002-2011, the biggest descent in its recent history. This development can be explained by the disproportionate increase in lowest income decile and the resulting decrease income gap. The catch up of the lowest wages happened in a context of unprecedented growth in the region’s economy, due to the sharp increase in commodity prices. In addition to classical market forces, research has also identified institutional changes in labor regulation as a causal factor for this development. In particular, the increases over the 70% of the minimum wages (measured in 2011 PPP USD) in 2002-2011 in AC, has been supplied by governments and demanded by the civil society as one of the most important tools to contribute to an increase in the lowest wages (Grimshaw and Miozzo, 2003). With the help of various descriptive statistics, we examine whether minimum wages are an adequate instrument for poverty reduction. Interestingly, minimum wages in the Andean countries do not mark the lower limit of wage incomes, but rather move in the middle: in 2002, 50 60% of workers earned less than the minimum wage, and in 2011 it was still 30-40%. This means that a minimum wage increase will directly affect the middle income deciles and not the lowest. Two empirical observation can help to explain this phenomena. First, the prevalence of informality, that affects all income deciles but is especially high in the poorest ones. Secondly, poor enforcement of labor law can create conditions in which employers do not obey existing legislation, thus violating workers' rights. These two factors may imply that the minimum wage is not directly responsible for increasing the income of the poorest but a mechanism to improve and sustain the middle class. However, with proper enforcement, minimum wages could be a good tool to improve the lowest wages; nevertheless, it is necessary to question if it deserves its current prominence, considering that the labor market structure could be unprepared to address its impact.