Minimum Wages in Kenya Mabel Andalón - Index of - IZA

I. Introduction
Policies to set ―living wages‖ are a popular but contentious instrument. As Blanchard
(2002) suggests, the main reason for instituting minimum wages is to empower workers
whose wages are constrained by the excessive market power of employers. Two other
arguments in favor of minimum wage setting relate to efficiency-wages and the fact that
minimum wages increase workers’ purchasing power, which in turn can stimulate labor
demand (Levin-Waldman, 1997). The efficiency-wage argument states that higher wages
can increase workers’ productivity, which in turn allows employers to pay higher wages.
One reason for an increase in productivity might be that higher wages allow workers to
improve their nutrition and their human development. Another version of this argument
is that minimum wages force managers to provide on-the-job training, which makes
workers more productive. Yet, it may be also argued that in the absence of well
developed incentives to provide training, firms may just become more selective, hiring
workers with higher productivity rather than incurring in the cost of training them. On its
part, the purchasing power argument requires that low wage business benefit from the
higher consumption of low-income workers, which may not necessarily be the case. In
absence of that link the effects are likely to be small, as increased sales are not likely to
compensate for higher wage costs.
Minimum wages might also help lift the working poor out of poverty by raising their
wages. The empirical literature in Latin America (Morley, 1995) and other developing
countries (Lustig and Mcleod, 1997) provides evidence that poverty falls as the minimum
wage rises. However, a theoretical model developed by Fields and Kanbur (2007)
suggests that poverty can actually decrease, increase or remain unchanged depending on
the degree of poverty aversion, the elasticity of labor demand, the ratio of the minimum
wage to the poverty line, and the extent of income sharing.
Yet, despite its potential benefits, minimum wages might also bring undesirable side
effects. The standard competitive model predicts that forcing the price of labor above the
market price leads to job losses in firms where regulations are enforced, and an increase
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