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The Lighthouse Effect And Beyond

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  • TITO BOERI
  • PIETRO GARIBALDI
  • MARTA RIBEIRO

Abstract

A large body of empirical literature indicates that, contrary to predictions from economic theory, wages in the informal sector increase after a minimum wage hike. This phenomenon was so far explained as a byproduct of a signal (a lighthouse) conveyed by statutory minima to wage setting in the informal sector. A simple matching model shows that an increase in wages in the informal sector may also be induced by significant sorting and composition effects between the formal and the shadow sectors in the aftermath of the increase in the minimum wage. Using data on Brazil, we find that sorting accounts for at least one third of the increase in average wages in the informal sector after a minimum wage hike. This contribution of endogenous sorting to wage dynamics in the informal sector is also increasing over time.

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Bibliographic Info

Article provided by International Association for Research in Income and Wealth in its journal Review of Income and Wealth.

Volume (Year): 57 (2011)
Issue (Month): (05)
Pages: S54-S78

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Handle: RePEc:bla:revinw:v:57:y:2011:i::p:s54-s78

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  1. Amadeo, Edward Joaquim & Gill, Indermit S. & Neri, Marcelo Cortes, 2000. "Brazil: The Pressure Points in Labor Legislation," Economics Working Papers (Ensaios Economicos da EPGE) 395, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
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Cited by:
  1. Fernando Borraz & Nicolás Gonzalez Pampillón, 2011. "Assessing the Distributive Impact of More than Doubling the Minimum Wage: The Case of Uruguay," Documentos de Trabajo (working papers) 1711, Department of Economics - dECON.
  2. Hazans, Mihails, 2011. "Informal workers across Europe : evidence from 30 European countries," Policy Research Working Paper Series 5912, The World Bank.
  3. Tonin, Mirco, 2011. "Underreporting of Earnings and the Minimum Wage Spike," IZA Discussion Papers 5942, Institute for the Study of Labor (IZA).
  4. Hazans, Mihails, 2011. "What explains prevalence of informal employment in European countries : the role of labor institutions, governance, immigrants, and growth," Policy Research Working Paper Series 5917, The World Bank.
  5. Muravyev, Alexander & Oshchepkov, Aleksey, 2013. "Minimum Wages, Unemployment and Informality: Evidence from Panel Data on Russian Regions," IZA Discussion Papers 7878, Institute for the Study of Labor (IZA).
  6. Alexander Muravyev & Aleksey Oshchepkov, 2013. "Minimum wages and labor market outcomes: evidence from the emerging economy of Russia," HSE Working papers WP BRP 29/EC/2013, National Research University Higher School of Economics.

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