IDEAS home Printed from https://ideas.repec.org/a/eee/streco/v77y2026icp137-148.html

Macroeconomic consequences of minimum wage in a developing country

Author

Listed:
  • Carrillo-Maldonado, Paul
  • Cruz, Zoe

Abstract

This paper analyzes the effect of minimum wage on the macroeconomic performance of Ecuador. We use narrative identification to obtain the structural changes because of minimum wage. We estimate the impulse response function to understand the dynamic response of output, prices, and unemployment to exogenous changes in the minimum wage through local projections and structural vector autoregressive. The main results show a positive response of the gross domestic product in the short term when the minimum wage increases. Other variables such as inflation, unemployment rate, and real wage do not respond to this shock.

Suggested Citation

  • Carrillo-Maldonado, Paul & Cruz, Zoe, 2026. "Macroeconomic consequences of minimum wage in a developing country," Structural Change and Economic Dynamics, Elsevier, vol. 77(C), pages 137-148.
    • Handle: RePEc:eee:streco:v:77:y:2026:i:c:p:137-148
    DOI: 10.1016/j.strueco.2026.01.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0954349X2600010X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.strueco.2026.01.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Card, David & Krueger, Alan B, 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, American Economic Association, vol. 84(4), pages 772-793, September.
    2. repec:fth:prinin:315 is not listed on IDEAS
    3. Jhon James Mora & Juan Muro, 2017. "Dynamic Effects of the Minimum Wage on Informality in Colombia," LABOUR, CEIS, vol. 31(1), pages 59-72, March.
    4. David Card, 1992. "Do Minimum Wages Reduce Employment? A Case Study of California, 1987–89," ILR Review, Cornell University, ILR School, vol. 46(1), pages 38-54, October.
    5. Guilherme Spinato Morlin & Marco Stamegna & David Cano Ortiz & Simone D'Alessandro & Pietro Guarnieri, 2024. "Tackling labour market inequalities through minimum and maximum wages," Discussion Papers 2024/320, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
    6. Carrillo-Maldonado, Paul & Díaz-Cassou, Javier, 2023. "An anatomy of external shocks in the Andean region," The Journal of Economic Asymmetries, Elsevier, vol. 27(C).
    7. Susana HERRERO OLARTE & Fabián VILLARREAL SOSA, 2020. "¿Influyen Los Salarios Mínimos En Los Ingresos De Los Más Pobres De Sudamérica?," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 20(2), pages 139-150.
    8. Paul Carrillo-Maldonado & Javier Díaz-Cassou & Miguel Flores, 2023. "What are the main variables that influence the dynamics of Ecuador’s sovereign risk?," Journal of Applied Economics, Taylor & Francis Journals, vol. 26(1), pages 2158009-215, December.
    9. Christina D. Romer & David H. Romer, 2010. "The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks," American Economic Review, American Economic Association, vol. 100(3), pages 763-801, June.
    10. Campos, Raymundo M. & Esquivel, Gerardo & Santillán, Alma S., 2017. "El impacto del salario mínimo en los ingresos y el empleo en México," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    11. Juan F. Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2010. "Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 665-696.
    12. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184, National Bureau of Economic Research, Inc.
    13. Budrys, Žymantas & Porqueddu, Mario & Sokol, Andrej, 2022. "Striking a bargain: narrative identification of wage bargaining shocks," Research Bulletin, European Central Bank, vol. 98.
    14. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 111-156, National Bureau of Economic Research, Inc.
    15. Stanley, T. D. & Jarrell, Stephen B. & Doucouliagos, Hristos, 2010. "Could It Be Better to Discard 90% of the Data? A Statistical Paradox," The American Statistician, American Statistical Association, vol. 64(1), pages 70-77.
    16. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    17. Giotis, Georgios & Chletsos, Michael, 2015. "Is there publication selection bias in minimum wage research during the five-year period from 2010 to 2014?," Economics Discussion Papers 2015-58, Kiel Institute for the World Economy.
    18. Dale Belman & Paul J. Wolfson, 2014. "What Does the Minimum Wage Do?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wdmwd.
    19. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    20. Ricardo Nogales & Pamela Córdova & Manuel Urquidi, 2019. "On the relationship between labor market policies and outcomes in Bolivia: A search and matching approach," Estudios de Economia, University of Chile, Department of Economics, vol. 46(1), pages 61-87, June.
    21. Olivier J. Blanchard, 1986. "The Wage Price Spiral," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(3), pages 543-565.
    22. Jordi Gali, 1999. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," American Economic Review, American Economic Association, vol. 89(1), pages 249-271, March.
    23. Mr. Romain A Duval & Davide Furceri & Bingjie Hu & João Tovar Jalles & Huy Nguyen, 2018. "A Narrative Database of Major Labor and Product Market Reforms in Advanced Economies," IMF Working Papers 2018/019, International Monetary Fund.
    24. Lemos, Sara, 2009. "Minimum wage effects in a developing country," Labour Economics, Elsevier, vol. 16(2), pages 224-237, April.
    25. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-144, January.
    26. Machin, Stephen & Manning, Alan, 1996. "Employment and the Introduction of a Minimum Wage in Britain," Economic Journal, Royal Economic Society, vol. 106(436), pages 667-676, May.
    27. Bunce, Alan & Carrillo-Maldonado, Paul, 2023. "Asymmetric effect of the oil price in the ecuadorian economy," Energy Economics, Elsevier, vol. 124(C).
    28. John P. A. Ioannidis & T. D. Stanley & Hristos Doucouliagos, 2017. "The Power of Bias in Economics Research," Economic Journal, Royal Economic Society, vol. 127(605), pages 236-265, October.
    29. David Card & Alan Krueger, 1993. "Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania," Working Papers 694, Princeton University, Department of Economics, Industrial Relations Section..
    30. Simon Jäger & Suresh Naidu & Benjamin Schoefer, 2024. "Collective Bargaining, Unions, and the Wage Structure: An International Perspective," NBER Working Papers 33267, National Bureau of Economic Research, Inc.
    31. Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
    32. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
    33. Ruiz-Arranz, Marta & Díaz Cassou, Javier, 2018. "Reformas y desarrollo en el Ecuador contemporáneo," IDB Publications (Books), Inter-American Development Bank, number 9235.
    34. Gert Peersman & Roland Straub, 2009. "Technology Shocks And Robust Sign Restrictions In A Euro Area Svar," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 727-750, August.
    35. Claudia Foroni & Francesco Furlanetto & Antoine Lepetit, 2018. "Labor Supply Factors And Economic Fluctuations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(3), pages 1491-1510, August.
    36. Wong, Sara A., 2019. "Minimum wage impacts on wages and hours worked of low-income workers in Ecuador," World Development, Elsevier, vol. 116(C), pages 77-99.
    37. Pierre-Richard Agénor & Peter J. Montiel, 2015. "Development Macroeconomics Fourth edition," Economics Books, Princeton University Press, edition 4, number 10494, December.
    38. Hristos Doucouliagos & T. D. Stanley, 2009. "Publication Selection Bias in Minimum‐Wage Research? A Meta‐Regression Analysis," British Journal of Industrial Relations, London School of Economics, vol. 47(2), pages 406-428, June.
    39. Karla Arias & Jeaneth Torres-Olmedo & Paul Alexander Carrillo-Maldonado, 2022. "Evaluación de las reformas que impulsan el empleo formal [Assessing reforms that boost formal employment]," Estudios Economicos, Universidad Nacional del Sur, Departamento de Economia, vol. 39(78), pages 33-59, january-j.
    40. HERRERO-OLARTE,Susana, 2022. "Salario Mínimo, Pobreza Y Clase Media. El Caso Ecuatoriano," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 22(1), pages 95-106.
    41. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Business Cycle Accounting," Econometrica, Econometric Society, vol. 75(3), pages 781-836, May.
    42. Zadia M. Feliciano, 1998. "Does the Minimum Wage Affect Employment in Mexico?," Eastern Economic Journal, Eastern Economic Association, vol. 24(2), pages 165-180, Spring.
    43. Rebitzer, James B. & Taylor, Lowell J., 1995. "The consequences of minimum wage laws Some new theoretical ideas," Journal of Public Economics, Elsevier, vol. 56(2), pages 245-255, February.
    44. Li, Dake & Plagborg-Møller, Mikkel & Wolf, Christian K., 2024. "Local projections vs. VARs: Lessons from thousands of DGPs," Journal of Econometrics, Elsevier, vol. 244(2).
    45. Mikkel Plagborg‐Møller & Christian K. Wolf, 2021. "Local Projections and VARs Estimate the Same Impulse Responses," Econometrica, Econometric Society, vol. 89(2), pages 955-980, March.
    46. Alun Lloyd Pope, 1990. "Biases Of Estimators In Multivariate Non‐Gaussian Autoregressions," Journal of Time Series Analysis, Wiley Blackwell, vol. 11(3), pages 249-258, May.
    47. José Luis Montiel Olea & Mikkel Plagborg‐Møller, 2021. "Local Projection Inference Is Simpler and More Robust Than You Think," Econometrica, Econometric Society, vol. 89(4), pages 1789-1823, July.
    48. David Neumark & Olena Nizalova, 2007. "Minimum Wage Effects in the Longer Run," Journal of Human Resources, University of Wisconsin Press, vol. 42(2).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    2. Budrys, Žymantas & Porqueddu, Mario & Sokol, Andrej, 2022. "Striking a bargain: narrative identification of wage bargaining shocks," Research Bulletin, European Central Bank, vol. 98.
    3. Jacho, Domenica & Cruz, Zoe & Carrillo-Maldonado, Paul, 2024. "Effect of terms of trade on the Latin American Labor market," International Economics, Elsevier, vol. 180(C).
    4. Òscar Jordà & Alan M. Taylor, 2024. "Local Projections," NBER Working Papers 32822, National Bureau of Economic Research, Inc.
    5. Li, Dake & Plagborg-Møller, Mikkel & Wolf, Christian K., 2024. "Local projections vs. VARs: Lessons from thousands of DGPs," Journal of Econometrics, Elsevier, vol. 244(2).
    6. Jörg Breitung & Ralf Brüggemann, 2023. "Projection Estimators for Structural Impulse Responses," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(6), pages 1320-1340, December.
    7. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    8. Ho, Paul & Lubik, Thomas A. & Matthes, Christian, 2024. "Averaging impulse responses using prediction pools," Journal of Monetary Economics, Elsevier, vol. 146(C).
    9. Luis E. Arango & Luz A. Flórez & Laura D. Guerrero & Alejandra Morales-Rojas, 2020. "Minimum wage effects on labour informality: heterogeneity across demographic groups in Colombia," Borradores de Economia 1104, Banco de la Republica de Colombia.
    10. Nadav Ben Zeev, 2019. "Is There A Single Shock That Drives The Majority Of Business Cycle Fluctuations?," Working Papers 1906, Ben-Gurion University of the Negev, Department of Economics.
    11. Jos'e Luis Montiel Olea & Ekaterina Zubova, 2026. "Approximate Minimax Estimation of a Bounded Normal Mean via Stochastic Mirror Ascent," Papers 2607.05350, arXiv.org.
    12. Dale Belman & Paul Wolfson & Kritkorn Nawakitphaitoon, 2015. "Who Is Affected by the Minimum Wage?," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 54(4), pages 582-621, October.
    13. Tomas Kucera, 2020. "Are Employment Effects of Minimum Wage the Same Across the EU? A Meta-Regression Analysis," Working Papers IES 2020/2, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jan 2020.
    14. Foroni, Claudia & Furlanetto, Francesco, 2026. "Explaining deviations from Okun’s law," European Economic Review, Elsevier, vol. 182(C).
    15. Arindrajit Dube & Attila Lindner, 2024. "Minimum Wages in the 21st Century," RFBerlin Discussion Paper Series 2425, ROCKWOOL Foundation Berlin (RFBerlin).
    16. Haroon Bhorat & Tara Caetano & Benjamin Jourdan & Ravi Kanbur & Christopher Rooney & Benjamin Stanwix & Ingrid Woolard, 2016. "Investigating the Feasibility of a National Minimum Wage for South Africa," Working Papers 201601, University of Cape Town, Development Policy Research Unit.
    17. John Schmitt, 2015. "Explaining the Small Employment Effects of the Minimum Wage in the United States," Industrial Relations: A Journal of Economy and Society, Wiley Blackwell, vol. 54(4), pages 547-581, October.
    18. Endong Wang, 2024. "Local projections identify the same policy counterfactuals as empirical and structural models," Papers 2409.09577, arXiv.org, revised Feb 2026.
    19. Miguel Cabello, 2022. "Robust Estimation of the non-Gaussian Dimension in Structural Linear Models," Papers 2212.07263, arXiv.org, revised Sep 2023.
    20. Atsushi Inoue & Òscar Jordà & Guido M Kuersteiner, 2026. "Inference for local projections," The Econometrics Journal, Royal Economic Society, vol. 29(1), pages 2-26.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:streco:v:77:y:2026:i:c:p:137-148. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/525148 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.