Working Paper

The Effects of Minimum Wages on the Labor Market and Income Distribution in Kenya: A CGE Analysis

In Kenya, there has been increased debate on the impact of minimum wage increases and
pay disparities between sectors. Long-term differences in earnings across sectors and
different regions (urban and rural) are reflected through higher poverty rates in rural areas,
especially among wage earners. This study evaluates the effects of minimum wages on labor
and its impact on growth. The study uses the single country static model, the PEP-1-1 model
and the Social Accounting Matrix for Kenya for the year 2009. The key research questions are
to assess the effects of minimum wages on rural or urban area labor markets, labor migration,
and income distribution. To achieve this, the study simulates three scenarios: increases in
minimum wages for formal workers in urban and rural areas at the same rate of 5%, different
rates (10% rural and 5% urban), and a cut in the minimum wages in both regions. The findings
indicate that increases in wage fuel the migration of labor from rural to urban areas, and
stifles the expansion of the economy. A rise in minimum wages has an overall negative effect
on incomes of rural households while benefiting urban households, which contributes to
increased inequality. A fall in real minimum wages on the other hand, is supportive of output
and employment growth.