The Consequences of Legal Minimum Wages in Honduras

Minimum wage policies are implemented in most developing countries, so understanding their consequences is critical to determine their effectiveness. This paper quantifies the labor market and poverty effects of Honduran minimum wages from 2005 to 2012. Using 13 household surveys as repeated cross-sections, I estimate the net effects of minimum wage hikes using variation from annual reforms to multiple minimum wages, a 60% increase, and changes in the number of minimum wage categories. Evidence shows that employers are partially complying with minimum wage laws, and respond to hikes by increasing their level of non-compliance. Higher minimum wages reduce covered (formal) employment and increase uncovered (informal) employment. Formal sector wages increase but greater labor supply in the informal sector leads to a negative net effect on wages. This last result is often empirically ambiguous, although consistent with the dual-sector minimum wage model. I find no evidence that minimum wages reduce extreme or moderate poverty.