Should minimum wage be regulated for developing countries

Question

I live in a developing country, where unemployment is at roughly 25%. There is a large divergence in population whereby skilled workers are typically active within in the manufacturing, finance, tourism, retail etc. sectors, however the bulk of the unskilled population typically would/could find employment in other sectors such as Manufacturing(again), Mining, Agriculture, construction and the like.

The problem is, within a highly unionised country, minimum wage is set to first world standards whereby its mostly cheaper to export our raw materials, and buy back finished products from China, India etc.

Is there a timing factor associated with implementation of minimum wage? surely there are natural supply vs demand factors at play in determining minimum wage. would it not be better to reach a critical mass in the labor force whereby skills, infrastructure & techniques are at par with international competition.

Answer 1

A welfare or efficiency enhancing minimum wage can be justified in several theoretical settings. For example, if there is monopsony (a single employer), the employer can internalize the effect of his labor demand on the labor market price (the wage) and therefore holds down both labor demand and wages. A minimum wage can therefore increase both employment and wages. In a developing country with a dominant industry like resource extraction or tourism controlled by a small number of connected families, this might be a decent model and therefore an industry specific minimum wage perhaps could work. Another theoretical motivation, if an industry has inelastic labor demand, due to pricing power in the good markets and low substitutability of other inputs for labor (maybe French wine would be an example of this), then the minimum wage could raise wages without great inefficiencies or reduced employment.

Of course economists dispute if those settings hold in practice. Emigration, competition in factor or product markets, and labor market competition across industries can lead to competitive wage setting even in monopsonistic industries. And minimum wages may work, and yet we might not have a good model for why. Or they might be helpful in the short-run but harmful in the long run. The empirical evidence of the short-run costs and benefits of small minimum wages changes does not show they are particularly harmful, even if we have good reason to think that the long run costs and the costs of large minimum wage increases would be significantly larger.