Timor-Leste: The Labor Market Impact of Minimum Wage Policy

Executive Summary

Timor-Leste is in the process of building the pillars of its economic and social policy in which minimum wages (MW) is a key area of focus.

The Labor Code established by the United Nations Transition Administration in East Timor (UNTAET) is in the process of revision and three Boards, pursuant to the Labor Code, have been commissioned, of which one deals with minimum wages.

The MW in Timor-Leste was informally set at US$85 per month or about US$4 per day by UNTAET. While this has not been legally binding, it has had an important impact on wage setting in the formal sector, including the civil service. Timor-Leste also has serious problems of unemployment, particularly among the youth and in urban areas. In that context, wage policy and bargaining mechanisms are important factors in determining labor market outcomes, though there are of course other key determinants related to the broader macroeconomic and business environments. The government realizes the importance of employment and thus, job creation, especially for youth and ex-combatants is one of the stability priorities.

The intent of the paper is to inform wage policy discussions in light of international and regional experience on wage policy and wage setting mechanisms, and analysis of labor market conditions and wages in Timor-Leste.

Data and literature on Timor-Leste are extremely sparse and very little information is available on bargaining mechanisms, growth of trade unions and impact of key demographic variables on labor force participation. The major source for this paper is the 2002 Poverty Assessment (PA), which was based on the Timor Living Standards Survey (TLSS). In addition, it also uses comparative information from other countries, in order to inform the discussion for Timor-Leste.

The paper is divided into three parts.

Part I is a discussion of the role, prevalence and importance of MW, followed by a review of international experience on the effects of MW on employment. Part II attempts to understand labor market conditions and wages in Timor-Leste that have a bearing on MW setting. Part III puts forth some policy options with regard to MW for Timor-Leste in the context of unemployment...

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