Employment Effects of Regional Minimum Wage Unification in Colombia

Before 1983, Colombia maintained a system of multiple minimum wages that varied by municipality. In 1984, this system was replaced by a single nationwide minimum wage of US$3.68 per day. This paper exploits the unexpected 5.71 percentage point increase in the real minimum wage for low-wage municipalities and the differential exposure of blue-collar versus white-collar workers to understand the effect of the unification on formal employment. Using repeated annual cross-sectional data from 1974 to 1991 in the manufacturing sector and a difference-in-differences approach, I find that the minimum wage unification led to a 10% decrease in the blue-collar/whitecollar employment ratio in the second year, rising to 13.8% five years after the reform. I also find that plants in low-wage municipalities, where the real wage increase was larger, suffered an 11.3% decrease in total employment. Together, these results suggest that the increase in the minimum wage caused by the unification negatively affected the level of formal employment in the manufacturing sector in Colombia, especially in municipalities where the adjustment was higher. Finally, I present an oligopolistic partial equilibrium model that supports these findings, highlighting that employment effects in the formal sector may be larger than in the overall economy due to the absorbing role of the informal sector.