Poverty Effects of the Minimum Wage: The Role of Household Employment Composition

Abstract

A change in a country’s minimum wage will in general affect the number of workers in covered sector employment, uncovered sector employment, and unemployment. The impact of these labor market adjustments on absolute poverty will depend on how the pattern of employment composition changes within households and on how income is shared within households. An earlier paper (Fields and Kanbur, 2007) focused on the income-sharing dimension of the problem. The present paper focuses on household employment composition. For a particular structure of the labor market— one with good jobs, bad jobs, unemployment, and adult and youth workers— and with a particular model of how the sectoral patterns of employment are translated into household employment composition, we analyze the impact of minimum wages on a class of absolute poverty measures. The precise characterizations demonstrate the need for a nuanced appreciation of the impacts of a minimum wage increase, since they depend intricately on the values of key parameters (the poverty line, poverty aversion, labor demand elasticity, and the starting level of the minimum wage). Moreover, the relationship between poverty and the minimum wage is in general non-monotonic, so that local effects can be quite different from the effects of large changes in the minimum wage.