Minimum Wages in Kenya Mabel Andalón - Index of - IZA

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survey. 8 This data suggest a negative relationship between the level of the minimum wage –in relation to the median—and the share of formal salaried employment in total employment within occupation-location cells. It also suggests a strong positive association between the share of self-employment and the minimum to median wage ratio. Notice, for example, that the correlation coefficient between the share of formal salaried employment and the minimum to median wage ratio is -0.46 while the correlation between the share of self-employment and the minimum wage in the cross section of occupations-locations is equal to 0.58. In contrast, the correlation with informal salaried employment is very small and negative (-0.09) indicating that minimum wages could actually reduce employment for salaried informal workers. We formalize these results by estimating the following regression: S � � � K � � oj � 1 �2 � oj oj Results are presented in tables 11 and 12. The dependent variable S oj is the share of formal salaried (columns 1 and 4), informal salaried (columns 2 and 5), and self- employed workers (columns 3 and 6) in total employment. Koj is the minimum to median wage ratio and � ojis the error term. The results on Table 11 are based on occupation- location-specific minimum to median wages while the results on Table 12 are based on the ratio of the occupation-location specific minimum wage to the median wage for all salaried workers. The results on Table 11 indicate that, assuming a minimum cell size of 10 observations, a 10-percentage point increase in the minimum to median wage reduces the share of formal salaried employment by 4.1 points, while increasing the share of self employment by 4.7 points. These results are statistically significant at the five percent level for self-employment and at the 10 percent level for salaried employment. In contrast, minimum wages are found to have a marginal effect on informal salaried employment. The level of significance increases and the size of the coefficients becomes 8 In figure 8, we do not consider occupation-location cells for which the number of observations available in the survey is below 35. 16
larger –but of similar magnitude-- if the threshold for the cell size is increased to 35 observations (columns 4-6). Results become weaker if rather than measuring the level of the minimum wage with occupation-location-specific minimum to median wage ratios, they are instead measured with the ratio of each minimum wage to the median wage of all salaried workers. 9 Using this methodologically better measure leads to much smaller estimates of the association between minimum wages and formal and self-employment. These estimates also suggest a decline in informal salaried employment as a result of higher minimum wages. Yet, given the number of observations, none of these coefficients are statistically significant at conventional levels. However, increasing the threshold for cell size to at least 35 observations increases the size and significance of effects for formal employment and self-employment. The direction and size of the estimates is now in line with the ones presented on table 11. A ten percent increase in the minimum to median ratio would lead to approximately 5.6 percentage points decline in the share of formal employment and a 5.9 percentage points increase in the share of self-employment. In sum, the evidence suggests that minimum wages in Kenya increase the share of self-employment and reduce the fraction of workers in formal salaried jobs. VII. Conclusions This paper has briefly reviewed the main arguments in favor and against minimum wages. While efficiency-wage arguments may be an important part of the story, the main reason for instituting minimum wages is not to fight poverty or inequality: there are other instruments to achieve that goal. Instead, the main justification is to empower workers whose wages are constrained by the excessive market power of employers. To the extent that there is enforcement, the most important argument for not fixing minimum floors is 9 The latter measure is better from a methodological point of view because it minimizes reverse causality. This arises from the fact a higher share of informal or self employment in total employment may reduce the median wage, and therefore increase the minimum to median wage in a given occupation-location. 17
Page 1 and 2: DISCUSSION PAPER SERIES IZA DP No.
Page 3 and 4: IZA Discussion Paper No. 3390 March
Page 5 and 6: in employment in the uncovered sect
Page 7 and 8: Employment Act (CAP 229). The objec
Page 9 and 10: In the analysis that follows the te
Page 11 and 12: implies that all non-clearly assign
Page 13 and 14: the average wage. Based on this lat
Page 15 and 16: In contrast, there appears to be a
Page 17: VI. Minimum Wages and Employment Ev
Page 21 and 22: the effect of minimum wages on pove
Page 23 and 24: Fields, Gary and Ravi Kanbur. 2007.
Page 25 and 26: 160 140 120 100 80 60 40 1991 1992
Page 27 and 28: Figure 3: Minimum Wage level (relat
Page 29 and 30: Figure 6: Minimum Wages in General
Page 31 and 32: Table 1: Gazetted Monthly Basic Min
Page 33 and 34: Table 3. Descriptive Statistics Var
Page 35 and 36: Table 5: Minimum Wages Variables by
Page 37 and 38: Table7: Minimum Wage Variables by A
Page 39 and 40: Table 9: Minimum Wages relative to
Page 41 and 42: Table 11: Structure of Employment a

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