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Although only 52 countries have ratified the International Convention on Minimum Wage Fixing (C131, 1970), practically all countries have some institutionalized form of setting wages and labor laws regulating the contracts between employers and workers. Algeria, Iraq, Egypt, Morocco, and Yemen ratified the convention, but government-mandated wages and guidelines are found in Comoros, Jordan, Kuwait, Lebanon, Oman, Saudi Arabia, Sudan, Syria, and Tunisia.

In absolute terms, minimum wages are higher in high-income countries, but in relative terms, they are higher in developing countries. Globally, in the world’s median country, the minimum wage is around 48 percent of per capita gross domestic product (GDP). Coming in at about 100 percent, Morocco had the highest ratio of minimum wages to per capita GDP in 2009. The ratio was around 60 percent in Algeria, Jordan, Syria, and Tunisia, but only just over 30 percent in Egypt and Lebanon.

Both Sides Now: Why Have a Minimum Wage?

There are several sides to the minimum wage debate. On the one hand, minimum wages can create domestic drivers for economic development. Provided they do not reduce employment at least by much, they can: boost domestic aggregate demand as the poor tend to spend relatively more on consumption; reduce incentives for more productive nationals to emigrate; and enable the low paid to spend more on education and health, thus increasing future productivity. Socially, they are seen as key to promoting inclusive economic development by lessening income inequalities.

On the other hand, minimum wages can discourage investments in human capital, as higher wages would be paid even to those with less education and lower skills. They can also lead to higher unemployment and increase the size of the informal sector. And they may slow the pace of poverty reduction by rendering traditional low-wage, labor-intensive industries uncompetitive—such as agriculture, fisheries, construction, mining, and garments. Finally, minimum wages can create “ripple effects” on the pay of higher paid workers, resulting in “wage push inflation” and leaving the poor in a static position.

Effects of Minimum Wages

International experience indicates that the effects of minimum wages vary by country and time. Each wage-setting mechanism can lead to different outcomes in the larger economy and in individual sectors. More generally, the effects of minimum wages vary by their level, coverage, enforcement, and impact on domestic and foreign investment.

Setting Minimum Wages

It is generally advisable that minimum wages be set in agreement between the social partners (representatives of employers and workers) or by the government in consultation with them. Adequate enforcement should be in place along with provisions to smoothly adjust the wage over time avoiding sudden changes. Consideration should be given to conditions on the labor demand side, bearing in mind whether the economy is growing or in recession. Minimum wages should also be in line with full employment goals at the macro level and with the productivity and external competitiveness of different sectors at the micro level. Minimum wages should take into account the cost of living, availability of social benefits, social insurance provisions, existence of subsidies and, more generally, what can be thought of as “fair” or “decent” pay.

Looking Forward

Minimum wages should be cast in the context of overall social policy. A critical issue is to establish empirically the extent to which “the low paid are poor” or “the poor are low paid.” If individuals are not working for social or medical reasons or because of high transportation or housing costs, public spending—on education, health, infrastructure, housing, and social protection—may be more potent areas for income security. Good practices for minimum wage setting include prescribing different levels for youth and adult workers, and including provisions for regular wage adjustments.

Zafiris Tzannatos is a senior international consultant for strategy and policy based in Lebanon. He was previously Chair and Professor of the Economics Department at the American University of Beirut. He is a former ILO advisor and has served as Advisor to Managing Director of the World Bank, where he was also Manager for Social Protection in the MENA, as well as, Leader of the Global Child Labor Program that he initiated. His publications include 14 books and monographs, and more than 200 reports and papers in the areas of labor economics, education, gender, child labor and, more broadly, social policy and development strategy. He holds a Ph.D. in Economics.