Minimum Wage and Inequality: Evidence on the Effects of Minimum Wage Changes on Inequality Indicators in Iran

The minimum wage is considered one of the most important achievements of labor movements in the economic history of humankind, and its determination is intended to improve the livelihoods and welfare of workers over time. One of the indicators used to assess this improvement is the measurement of income inequality in society, as workers are predominantly concentrated in the middle and lower income deciles, and their vulnerability increases as inequality rises. Accordingly, this study examines the effect of minimum wage changes on income inequality in Iran. Data for the period from 1984 to 2023 are analyzed using the Autoregressive Distributed Lag (ARDL) model, and the effect of minimum wage changes on inequality is assessed using two indicators, namely the Gini coefficient and the Palma ratio. The results show that, in the short run, the minimum wage contributes to improving income distribution according to both indicators; however, in the long run, inequality according to the Palma ratio increases due to firms’ decisions to reduce labor hiring. In both models, the estimated coefficients support the inverted-U Kuznets hypothesis. However, in the Palma model, the effect of per capita output growth on inequality emerges with longer lags, such that the benefits of growth initially accrue to the middle income deciles and subsequently reduce the gap between the lowest- and highest-income groups. Therefore, adopting a growth strategy that targets all income deciles, such as “inclusive growth,” would be more effective.