Improving compliance with minimum wage standards

Uma Rani, guest blogger, is a Senior Economist at the Research Department, International Labour Office (ILO) in Geneva

Minimum wage standards have the force of law. They establish a legal right of workers to receive a minimum amount of remuneration for work performed during a given period, which cannot be reduced by collective agreement or an individual contract. Yet, establishing a legally binding minimum wage does not in itself mean that these are applied in practice. In reality, compliance is always less than perfect in both advanced and developing countries. Non-compliance with minimum wage standards has immediate negative social consequences not only for workers and their families, but also for compliant employers, because it gives non-compliant enterprises an illegitimate cost advantage. Enhancing compliance can thus be seen as motivated by reasons that range from upholding the rule of law and fairness, to social protection and respect for worker rights.
 
Compliance rates vary widely across countries. Among developed countries, empirical evidence shows that in the United States about 2.2 per cent of all hourly paid workers were paid less than the minimum rate in 2014. In the United Kingdom, it is estimated that 7.3 per cent of 16-17 year olds, 5.5 per cent of 18-20 year olds, and 0.8 per cent of adults earned below their applicable age-related minimum wage in April 2013. Non-compliance in developing countries, as measured by the proportion of wage earners who are paid below the minimum wage, is comparatively higher (see Rani et al., 2013 for details on methodology).
 
An analysis of developing countries shows that the share of covered workers earning less than the legal minimum wage varies enormously from less than 10 per cent in Viet Nam or Mexico, up to about 50 per cent in Indonesia or Turkey. Within countries, there are significant differences in non-compliance rates across different groups of the population. Across a range of developing countries, we find that: non-compliance is more widespread in rural than in urban areas, and in the informal than in the formal economy. Women are also frequently more likely to be underpaid than men, as are disadvantaged ethnic or social groups such as so-called scheduled castes and scheduled tribes in India or indigenous in Peru or Africans/Blacks in South Africa.
 
In this context, understanding which factors determine compliance is important. Our analysis shows that compliance is affected by both the level at which minimum wages are set relative to average wages, as well as by institutional factors. Looking at the level, Figure 1 shows for a sample of countries that when minimum wages are very low, only a few workers will be paid less than the minimum, as in the case of Mexico and Viet Nam. This is quite natural: only when minimum wages truly “bite” in terms of the level does compliance become a challenge. At the same time, above a certain threshold, when the level of the minimum wage is beyond the capacity of many enterprises to pay, non-compliance is likely to become inevitable.
 
Figure 1. Minimum wage and compliance rates in selected developing economies, latest years

 
For countries with intermediate minimum wage levels, compliance rates vary substantially. We see that although the level of minimum wages is similar in Brazil, India and South Africa, compliance is substantially higher in the former than the latter two countries. We also see that compliance levels are similar in Peru and Costa Rica, although the minimum wage is higher in the latter. The fact that some countries successfully combine a “biting” minimum wage with relatively high compliance indicates that while non-compliance is associated with the level at which the minimum wage is set, it is also linked to the broader institutional environment.
 
Compliance can be increased through a number of implementation measures, which include information and awareness raising activities in local languages, capacity building activities for employers’ and workers’ representatives, and empowering workers to claim their rights through individual complaints as well as collective action. There is also a need to promote the formalization of workplaces and develop coherent enforcement strategies that involve monitoring systems for the detection of non-compliance, targeted labour inspections, and sanctions that function as a deterrent to non-compliance.  
 
The extent of non-compliance can also vary depending on the design of minimum wage policies and the number of rates. Awareness raising and labour inspection are easier in countries with simple, national minimum wages rather than complex sectoral or occupational minimum wages, with numerous rates. In India, for example, there exist more than 1,700 different minimum wage rates. This obviously makes minimum wage rates much more difficult to communicate and inspect than, for example, in Brazil, where there is in principle only one rate that applies in any given State.
 
Hence, each country should be encouraged to undertake its own assessment of the specific reasons which may cause non-compliance.  Compliance depends on the effectiveness of the entire process of designing and implementing minimum wage policies, from fixing the right level to identifying an appropriate rate structure and effective enforcement measures. All of this should be done in full consultation with employers and workers’ organizations.
 
This blog piece is based on Rani, Belser, Oelz, and Ranjbar, 2013. Minimum wage coverage and compliance in developing countries, International Labour Review, Vol.152 (3-4) (available at: http://onlinelibrary.wiley.com/doi/10.1111/j.1564-913X.2013.00197.x/abstract ).