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Minimum Wage and Macroeconomic Adjustment: Insights from a Small Open, Emerging, Economy with Formal and Informal Labor


  • Oscar Iván Ávila-Montealegre
  • Anderson Grajales-Olarte
  • Juan J. Ospina-Tejeiro
  • Mario A. Ramos-Veloza


We examine the adjustment of a small, open, emerging market economy (SOEME) to an unexpected increase in the minimum wage using an extended New-Keynesian SOE model that incorporates heterogeneous households, a flexible production structure, and a minimum wage rule. We calibrate the model for Colombia and find that an unexpected increase in the minimum wage has significant effects on the low-skilled labor market, and weaker impacts on inflation and the policy interest rate. The rise in the minimum wage increases production costs and prompts the substitution of formal low-skilled labor with informal workers and machinery, resulting in reduced output, increased inflation, and higher policy interest rates. We also observe that the minimum wage influences the transmission of productivity, demand, and monetary shocks, leading to a more persistent impact on macroeconomic variables, and a less efficient monetary policy to control inflation. Our findings suggest that the minimum wage has important macroeconomic implications, and affects emerging market economies through different channels than in developed economies. **** RESUMEN: En este artículo estudiamos el ajuste macroeconómico de una economía emergente pequeña y abierta ante un cambio inesperado en el salario mínimo. Para ello, construimos un modelo neo-keynesiano de economía pequeña y abierta con hogares heterogéneos, una estructura de producción con distintos tipos de trabajo y de capital, y una regla de ajuste del salario mínimo que responde a la inflación y productividad laboral pasadas, así como a choques inesperados. Tras calibrar el modelo para Colombia encontramos que un aumento inesperado del salario mínimo tiene efectos significativos sobre la producción y el empleo, y efectos moderados sobre la inflación y la tasa de política monetaria. En particular, observamos que el choque incrementa los costos de contratar mano de obra formal no calificada, la cual es sustituida por trabajadores informales y maquinaria. A pesar de esta sustitución, los mayores costos generan una contracción de la actividad económica, acompañada por un incremento en la inflación y en la tasa de política monetaria. Por otra parte, encontramos que la existencia de una regla de ajuste del salario mínimo afecta la transmisión de choques convencionales (productividad, demanda y política monetaria), aumentando su persistencia y reduciendo la efectividad de la política monetaria. Estos resultados son relevantes para economías emergentes en las que la política de salario mínimo tiene una mayor incidencia en el mercado laboral.

Suggested Citation

  • Oscar Iván Ávila-Montealegre & Anderson Grajales-Olarte & Juan J. Ospina-Tejeiro & Mario A. Ramos-Veloza, 2023. "Minimum Wage and Macroeconomic Adjustment: Insights from a Small Open, Emerging, Economy with Formal and Informal Labor," Borradores de Economia 1264, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:1264
    DOI: 10.32468/be.1264

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    References listed on IDEAS

    1. Erik Hurst & Patrick J. Kehoe & Elena Pastorino & Thomas Winberry, 2022. "The Distributional Impact of the Minimum Wage in the Short and Long Run," NBER Working Papers 30294, National Bureau of Economic Research, Inc.
    2. Sergio Rebelo, 2005. "Real Business Cycle Models: Past, Present and Future," RCER Working Papers 522, University of Rochester - Center for Economic Research (RCER).
    3. Glover, Andrew, 2019. "Aggregate effects of minimum wage regulation at the zero lower bound," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 114-128.
    4. Dmitry Plotnikov, 2017. "What Prevents a Real Business Cycle Model from Matching the U.S. Data? Decomposing the Labor Wedge," IMF Working Papers 2017/201, International Monetary Fund.
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    More about this item


    modelo de equilibrio general dinamico y estocástico; salario mínimo; mercado laboral informal; política monetaria; agentes heterogeneos; DSGE model; minimum wage; informal labor markets; monetary policy; heterogeneous agents;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J46 - Labor and Demographic Economics - - Particular Labor Markets - - - Informal Labor Market

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