TOO STRICT, TOO WEAK, OR JUST RIGHT? MINIMUM-WAGE REGULATION AND THE FINANCE–EMPLOYMENT–ECONOMIC PERFORMANCE NEXUS IN DEVELOPING ECONOMIES

Abstract

This study examines whether the association between financial development, employment and economic performance varies across minimum-wage regulatory regimes in developing economies. It uses an unbalanced panel of 96 countries from 2000 to 2022. The dependent variable is the natural logarithm of real gross domestic product in constant 2015 US dollars; therefore, it measures the real output level rather than the annual GDP growth rate. Financial development is represented by domestic credit to the private sector and broad money, both as percentages of GDP, while employment is measured by the total labour-force participation rate. The analysis combines dynamic System Generalised Method of Moments estimation with Hansen-type panel threshold estimation. The reported estimates show positive, statistically significant interactions between employment and both financial-development proxies. Two significant minimum-wage thresholds are identified for each proxy: 3.617 and 5.133 for the domestic-credit model, and 5.133 and 8.447 for the broad-money model. The intermediate regime contains the most consistently significant positive conditional association. However, because formal equality tests between regime coefficients are not available in the supplied results, the estimates do not establish that its coefficient is statistically larger than every other regime. The threshold pattern remains qualitatively stable under alternative bootstrap and trimming choices and after four outlier countries are excluded. The results indicate institutional contingency rather than a universal optimum and should be interpreted as associations, not causal effects. They suggest that minimum-wage policy, access to finance, productivity support and enforcement capacity should be considered jointly, while country-specific causal research is needed before prescribing regulatory targets.