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The impact on inequality of raising the minimum wage: Gap- narrowing and reranking effects

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  • Diego F. ANGEL URDINOLA
  • Quentin WODON

Abstract

Raising the minimum wage may reduce inequality by increasing the wages of low-skill workers, but it may also increase inequality due to negative impacts on employment that produce wage losses. Using estimates of the elasticities of wages and employment to changes in the minimum wage in Colombia and Brazil, we show that the net impact on inequality of increasing the minimum wage may depend on the distributional weights used for inequality measurement. The results are obtained by decomposing the Gini index into reranking and gap-narrowing Effects. Inequality increasing reranking effects, which are associated to job losses, may dominate inequality decreasing gap-narrowing effects, which are associated with wage gains, when high weights are placed on workers with low earnings. For standard distributional weights however, the net impact is a reduction in wage inequality.

Suggested Citation

  • Diego F. ANGEL URDINOLA & Quentin WODON, 2003. "The impact on inequality of raising the minimum wage: Gap- narrowing and reranking effects," Archivos de Economía 3602, Departamento Nacional de Planeación.
    • Handle: RePEc:col:000118:003602
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    2. Maria Otilia Orozco, 2005. "Colombia's Higher Education Quality Control System and Potential for Further Development," Archivos de Economía 2139, Departamento Nacional de Planeación.
    3. Diego Angel-Urdinola, 2008. "Can a minimum wage increase have an adverse impact on inequality? Evidence from two Latin American economies," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 6(1), pages 57-71, March.
    4. José Daniel REYES PENA, 2003. "The cost of disinflation in Colombia: -A sacrifice Ratio Approach-," Archivos de Economía 3579, Departamento Nacional de Planeación.
    5. Alexandros Karakitsios & Manos Matsaganis, 2018. "Minimum Wage Effects on Poverty and Inequality," DEOS Working Papers 1801, Athens University of Economics and Business.
    6. Diego F. ANGEL-URDINOLA, 2004. "A Minimum Wage Increase Can Have an Adverse Distributional Impact:The case of Colombia," Archivos de Economía 1922, Departamento Nacional de Planeación.

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