Investigating the Relationship Between Minimum Wage and Poverty in Kenya

Abstract

Minimum wage has been adopted as a wage-fixing mechanism in over 90% of the world economies. In Kenya, it has been in use for over 50 years with two key goals associated with its implementation: first, to protect workers against exploitation; and second, to protect workers against poverty. This study purposed to evaluate the effectiveness of minimum wage on the second goal. Specifically, the study sought to analyse the effect of minimum wage on food poverty and absolute poverty in rural and urban areas. Using the KIHBS 2015/2016 dataset, the study applied a bivariate probit function to analyse food poverty 𝑍𝑓 and absolute poverty 𝑍𝑏𝑛 against minimum wage, with control variables: area of residence, household size, age, number of sources of income, gender, marital status, and education level. The study established that there exists a significant, negative relationship between minimum wage and poverty. However, the results showed that absolute poverty was more sensitive to minimum wage changes than food poverty, exhibiting a higher maximum likelihood coefficient of 15.99% against 10.69%. Workers in urban areas were additionally at higher risk of being both food poor and absolutely poor than their counterparts in rural areas. Nevertheless, education presented a larger influence on absolute poverty than minimum wage, while it ranked second to minimum wage in its influence on food poverty. Based on these results, the study established that while minimum wage policy is important in reducing poverty, it is not sufficient. Its implementation should be done in tandem with other policies such as quality education-driven policies in order to make minimum wage effective as an anti-poverty instrument. Moreover, devolution-driven policies that will promote urban to rural migration should also be considered by policy makers.