The minimum wage in Ecuador: Its impact on poverty, inequality and labour market structure

Abstract

This article aims to present an overview of the impact of the minimum wage (MW) on the labour market in Ecuador. This Andean country is taken as a sample of all the countries in the region, with similar structural limitations in their labour markets. In Ecuador, the MW is positioned in the intermediate deciles. In the lower deciles, most of the workforce is informal or self-employed. The ‘lighthouse effect’ of the MW on the rest of the employed and self-employed workers is presumed to be the main force in reducing poverty and inequality. The lack of compliance with the labour regulation is, in part, explained by low levels of demand and productivity. These factors would limit firms’ ability to hold a wage increase and unemployment would rise. As savings are low and the welfare state does not offer a safety net to guarantee subsistence without a job, unemployed workers quickly transition into informality and self-employment. We use a two-way fixed effects regression to test this hypothesis. Results show that they cannot be rejected, suggesting the need for new labour policies to reduce poverty and inequality, according to the economic reality of the region.