A popular and compelling argument in favor of raising legal minimum wages is that
higher minimum wages will reduce poverty. Quite simply: putting more money into
the pockets of low-income workers will allow them to purchase more of the basic
goods and services needed to survive. In theory, if the wage increase is large enough,
poor people’s incomes will rise, lifting them out of poverty.
This sounds good in theory—but it does not always happen in practice. That is because
the relationship between minimum wages, worker incomes, and employment levels,
and the incidence and depth of poverty are complex.
First, the minimum wage does not affect all workers or affect them equally. That makes
it important to know which workers are most likely to be affected—and how. Second,
even if a minimum wage raises the incomes of some workers, it might not raise the
incomes of poor households. The informal sector, where workers are not effectively
covered by minimum wage legislation, is typically large in developing countries, and
poverty tends to be more widespread in the informal sector. Even in the formal sector,
minimum wage laws are often poorly enforced.