Ripple effects of mimimum wages and the response of labour markets in Kenya
Omolo, Odhon'g Jacob
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Minimum wage fixing is a key wage determination ;: approach. The use of minimum wages as a benchmark for wage determination in all sectors of the economy contributes to the existence of ripple effects on other wages, and hence distortions in the labour market. This study aimed at estimating the ripple effects of minimum wages on other wages; establishing if the ripple effects differ across sectors of the Kenyan economy; investigating the response of the Kenyan labour market to the ripple effects; and assessing the effectiveness of minimum wage enforcement mechanism in Kenya. The study used a balanced panel data for the period 1986 to 2008, with sectors as the unit of analysis. It employed a multi-pronged approach involving estimation of a random effects model of wage estimation and analysis of measures of importance and toughness of the minimum wage. The study established that minimum wages produce significant wage ripple effects. The ripple effects and their strength, however, differ across wage determination approaches and sectors of the economy. The study also found that the Kenyan labour market responds unequally to the ripple effects. It established that the importance and toughness of minimum wage legislation vary across sectors. With a national mean Kaitz ratio of 0.54, the study found that Kenya's minimum wages have a relatively high biting effect. Based on international benchmarks, the Kenyan labour inspectorate staff was found to be overburdened by up to 167 percent, implying ineffectiveness of the labour inspectorate services and minimum wage enforcement mechanism. Arising from the study findings, it is important that the Ministry of Labour in consultation with social partners and other stakeholders undertake measures to integrate ripple effects of minimum wages in wage determination. There is also need for the Ministry to enhance enforcement of minimum wage regulations. This can he undertaken through modernization and integration of labour inspectorate services, and introduction of self-regulation in the labour sector. These measure are imperative if the minimum wage policy is to achieve its goal as an economic and social policy tool.