A Minimum Wage Increase Can Have an Adverse Distributional Impact:The case of Colombia.

A rise in the minimum wage may contribute to decrease earnings inequality by promoting larger wage increases for workers in the low tail of the wage distribution, but it may also increase inequality by promoting layoffs. This paper uses a semiparametric model to analyze the impact on inequality of a 6.3 percent increase in the real minimum wage in Colombia between 1995 and 1999, a period of economic downturn. Simulations suggest that if the employment effects of the minimum wage increase are ignored, the underlying policy would contribute to reduce earnings inequality. On the contrary, by considering the drop in wages of those who lost their jobs, simulations suggest that the policy in question would increase earnings inequality under some assumptions about the employment elasticity of the minimum wage and the new level of earnings unemployed workers rely upon.