Macroeconomic consequences of minimum wage in a developing country

Abstract

This paper analyzes the effect of minimum wage on the macroeconomic performance of Ecuador. We use narrative identification to obtain the structural changes because of minimum wage. We estimate the impulse response function to understand the dynamic response of output, prices, and unemployment to exogenous changes in the minimum wage through local projections and structural vector autoregressive. The main results show a positive response of the gross domestic product in the short term when the minimum wage increases. Other variables such as inflation, unemployment rate, and real wage do not respond to this shock.