Minimum wages, low-wage workers, and compliance under imperfect enforcement

This paper examines the impact of a substantial minimum wage increase in Uruguay — a middle-income developing economy — on labor market outcomes. Using administrative data and a difference-in-differences approach, we study the effects of a 2005 reform that raised the real minimum wage by 80 percent within a year. We find large and persistent wage gains for low-paid workers, with no statistically significant effects on employment or hours worked. Beyond labor market outcomes, we document a temporary decline in compliance with the statutory wage floor, particularly among smaller firms, followed by a gradual strengthening of enforcement. Overall, our results highlight how enforcement capacity and institutional features shape the effects of minimum wage reforms in developing economies.