Minimum Wage Legislation and Employment Performance in Zambia: An ARDL Bounds Testing and Granger Causality Analysis, 1997 to 2024

Abstract

Zambia’s statutory minimum wage for domestic workers was revised only six times between 1982 and 2024. During the long intervals between revisions, inflation repeatedly eroded the real value of the wage floor by more than a third before a new adjustment was gazetted. Whether this pattern of infrequent, discrete, and partially eroded wage floors has measurable consequences for aggregate employment remains an open empirical question. Using annual data for 1997–2024, this study examines the short-run effects, long-run association, and direction of predictive causality between the real statutory minimum wage and employment performance in Zambia. The employment-to-population ratio is modelled as a function of the real statutory minimum wage for domestic workers, real gross domestic product growth, and consumer price inflation. Augmented Dickey–Fuller, Phillips Perron, and Kwiatkowski Phillips Schmidt Shin tests indicate a mixture of I(0) and I(1) series, with no variable integrated of order two, thereby supporting use of the autoregressive distributed lag bounds-testing procedure of Pesaran, Shin and Smith (2001). The bounds-test F-statistic is 3.792, which lies within the inconclusive band at the 10 per cent level. The error-correction coefficient is nevertheless negative and highly significant at −0.951 (t = −3.572), providing supplementary evidence of rapid adjustment, conditional on the existence of a stable long-run relation. The estimated long-run elasticity of the employment-to-population ratio with respect to the real minimum wage is positive at 0.078 and statistically significant at the 1 per cent level; its sign and significance are preserved under dynamic ordinary least squares, trend-augmented static regression, and static regression with heteroskedasticity- and autocorrelation-consistent standard errors. In the short-run, the real minimum wage has a positive but-statistically insignificant coefficient, while pairwise, multivariate, and Toda–Yamamoto tests do not establish a robust causal ordering in either direction. The aggregate evidence therefore provides no support for a negative employment effect of the statutory wage floor over the period examined. The positive long-run association is consistent with monopsonistic and efficiency-wage mechanisms, but it may also reflect common trends, limited enforcement, and extensive informality. The findings consequently support cautious regularisation of minimum-wage policy while underscoring the greater importance of structural transformation and employment-intensive growth.