An Empirical Analysis of the Relationship between Minimum Wage, Investment and Economic Growth in Ghana

Abstract

The paper determines whether minimum wage stimulates economic growth in Ghana, for the period 1984-2013, using autoregressive distributed lag (ARDL) bounds testing approach to cointegration, within an error correction framework. A preliminary test provides evidence of correlation between minimum wage and investment, thereby allowing for an examination of the wage-growth relationship. Four equations are used to determine the relationship between minimum wage and economic growth. The results from the simple regression of minimum wage on economic growth indicate a positive and statistically significant impact of minimum wage on economic growth both in the long-and short-run. However, the results from other estimations of the wage-growth relationship when investment, credit to the private sector and an interaction term of wage and investment are controlled for precludes any naïve policy formulation which may be solely based on the positive wage-growth relationship obtained. Specifically, the results from the other estimations imply minimum wage can only be growth enhancing if it is met by simultaneous increases in investment spending, as well as deliberate and sustained policies aimed at ensuring credit to finance private investment are readily available, easily accessible, and affordable. In addition, the ratio of public investment to tax revenue must increase as minimum wage increases since such complementary changes are more likely to lead to economic growth.

Keywords: minimum wage, investment; economic growth, ARDL, DOLS, ECM.