The Effects of Raising the Minimum Wage When Most Workers are Informal: The Case of Ecuador

This paper examines the impact of changes in the minimum wage (MW) on the Ecuadorian labor market from 2007 to 2019. Results indicate that increasing the MW would reduce salaried employment but would not raise unemployment. Given the limited welfare state and savings of displaced workers, the lack of employment would result in an immediate rise in self-employment and a diminution of their perceived income. The inadequate enforcement of labor legislation concerning wages and the formalization of work partly facilitates this situation. These findings cast doubt on the effectiveness of the MW as a strategy to alleviate poverty and inequality in Ecuador and encourage the development of public policy strategies capable of addressing the region’s realities.