Relationship between Minimum Wage and Income Distribution in Iran

Existence of positive relationship between on the other hand, income distribution and macroeconomic variables such as productivity and economic growth, and on the other hand undesired impacts of unfair distribution of income on social variables including crime and delinquency, has caused [fair] distribution of income to be one of the most important macroeconomic goals of governments. Hence, it is one of policy-maker's main concerns and has obtained a special stand in socio-economic planning. In this regard, economic policy-makers are interested in explaining the relationship between income distribution and macroeconomic variables so that they can help the economy to achieve proper distribution of income through identification and control of influencing variables. Economic literature suggests that increasing the minimum wage is a potential way of improving low-income worker's level of living and decreasing income inequality. Increase in the minimum wage level has been one considered problems in Iran during the recent years. In fact, it has become a main economic challenge which has always laid huge costs on government and society. Therefore, knowledge of the relationship between minimum wage and inequality is necessary for government to decrease the mentioned costs. Hence, an essential question proposed for Iranian economy is," How is the relationship between the increase in minimum wage level and income inequality?" The main goal of this article is to analyze the effects of minimum wage on income distribution in the economy of Iran. We use an econometric model based on Kuznets Hypothesis to study the effects of minimum wage on distribution of income. For this purpose, annual time series of Iranian economy for the period 1969 to 2005 have been used. Using seven different models, the effects of nominal and real minimum wage on income distribution were estimated with Ordinary Least Square (OLS) method. Finally, the appropriate model was chosen according to goodness-of –fit and robustness criteria. The literature suggests that the effects of minimum wage on distribution of income are vague, though most of theories believe that increase in minimum wage can lead to decrease of income inequality. Empirical findings suggest that over the period from 1969 to 2005 in Iran: a) The Kuznet's hypothesis implying the presence of an inverted-U shape relationship between income distribution and per capita income is not rejectable. b) Increase in real minimum wage level in Iran has decreased income inequalities significantly in such a way that the interval of minimum wage effects on Gini coefficient has been estimated from 0.017 to. 018. Therefore, we can argue that the minimum wage has been among key influencing variables on income distribution in Iranian economy. c) Increase in minimum wage levels not only has not have negative inflationary effects, but also has decreased inflation through improving labor productivity and thereby has improved the distribution of income. Although little, these effects have been statistically significant. The main policy implication of this research is that Iranian government can decrease income inequalities significantly besides keeping worker's purchasing power in inflations through an increase in real minimum wage levels without any serious worry about negative inflationary consequences. Of course, the government can adopt other policies besides increasing minimum wage levels including appropriate selection and implementation of other complementary supportive policies, extending social supports (creating efficient social security system), empowering workers through educating and training them, and creating a proper and efficient tax system.