Economy-wide Implications of Minimum Wage in Ethiopia: A Computable General Equilibrium Analysis

Alemu Lambamo Hawitibo



As with many government policies, minimum wage has several positive and negative economic effects. In spite of the differing effects of minimum wage legislation, its macroeconomic impact has found little interest in empirical study in Ethiopia and little do we know on how exactly the minimum wage affects macroeconomic variables. Thus, this study examines the macroeconomic effects of minimum wage in Ethiopia using A Static CGE model. For these purposes, we utilized the data of the 2005/06 SAM of EDRI, CSA, and MCS. Simulation results show that a rise in minimum wage would lead to a marginal rise in output in agriculture and service sectors as well as a significant rise in output of industry and mining sectors. The impact of minimum wage increase on household income and consumption is mixed; while it leads to rise income and consumption of rural households, there is a marginal fall in income and consumption of urban households. In terms of price effect, an increase in minimum wage would lead to a slight rise in general price level. A rise in minimum wage has also positive effects on government income and negative impact on the government expenditure. Moreover, the total welfare of households has improved as a result of adjustment in the minimum wages, suggesting the positive welfare effect of minimum wages policy.

Key Words: Minimum wage, Static CGE, Macroeconomic variables, Ethiopia.



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ISSN : 2251-1555