Minimum Wages and Household Poverty: General Equilibrium Macro-Micro Simulations for South Africa

The poverty-reducing effects of minimum wages depend on its effectiveness in targeting the poor and the extent to which job losses and price increases offset income gains. We develop a general equilibrium microsimulation model to simulate the economywide effects of minimum wages in South Africa. We find minimum wages lead to a marginal decline in poverty and overall inequality. However, job losses are more likely to affect the poorest among minimum wage workers, while rising production costs reduce overall household welfare. The policy is not an effective anti-poverty tool in South Africa given poor targeting and adverse price effects, which are often unaccounted for in policy simulations. (C) 2011 Elsevier Ltd. All rights reserved.