Minimum wages and low wage workers: Compliance as non-employment margin

This paper examines the impact of a substantial minimum wage increase in Uruguay - a middle-income developing economy - on wages and employment. Using administrative data and a difference-in-differences approach, we analyze the consequences of a 2005 policy reform that raised the real minimum wage by 80% within a year. Our findings show that the reform led to significant wage gains for low-wage earners, with at most minimal negative effects on employment. Survey data further reveal no significant changes in unemployment or informality, suggesting the reform did not distort labor market dynamics. To contextualize these results, we investigate compliance with minimum wage laws and document a post-reform decline in compliance, particularly among low-wage workers. This pattern aligns with firms' cost-benefit trade-offs under weak enforcement of wage regulations. Our study contributes to the literature by providing causal evidence on the labor market effects of minimum wage policies in a developing economy, underscoring the pivotal role of enforcement in shaping policy outcomes.