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The Effects of the Minimum Wage in the Formal and Informal Sectors in Brazil

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  • Lemos, Sara

    (University of Leicester)

Abstract

The minimum wage literature is very limited on empirical evidence for developing countries. This already limited literature is even more limited on the effects of the minimum wage in the informal sector, where most of the poor are. Extending the understanding of minimum wage effects both in developing countries and in particular in the informal sector is crucial if the minimum wage is to be used as a policy to help poor people in poor countries. This paper estimates wage and employment effects, accounting for sorting into the formal and informal sectors. The data used is a monthly Brazilian household survey from 1982 to 2000 at individual and regional levels. The formal and informal sectors employment effects were both found to be negative, consistent with the presence of a large spike, substantial spillover effects, and the associated compression effect in the wage distribution of both sectors. This suggests a downwards sloping labour demand curve in both sectors, challenging the standard Two Sectors Model as inadequate to explain the effect of the minimum wage on the formal and informal sectors in Brazil and in Latin America more generally.

Suggested Citation

  • Lemos, Sara, 2004. "The Effects of the Minimum Wage in the Formal and Informal Sectors in Brazil," IZA Discussion Papers 1089, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1089
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    Cited by:

    1. David Neumark & William Wascher, 2006. "Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research," NBER Working Papers 12663, National Bureau of Economic Research, Inc.
    2. Melanie Khamis, 2013. "Does the minimum wage have a higher impact on the informal than on the formal labour market? Evidence from quasi-experiments," Applied Economics, Taylor & Francis Journals, vol. 45(4), pages 477-495, February.
    3. Gindling, T.H. & Terrell, Katherine, 2009. "Minimum wages, wages and employment in various sectors in Honduras," Labour Economics, Elsevier, vol. 16(3), pages 291-303, June.
    4. Auerbach, Paula & Genoni, María Eugenia & Pagés, Carmen, 2005. "Social Security Coverage and the Labor Market in Developing Countries," IDB Publications (Working Papers) 1111, Inter-American Development Bank.
    5. Davidescu, Adriana Anamaria & Schneider, Friedrich, 2017. "Nature of the Relationship between Minimum Wage and the Shadow Economy Size: An Empirical Analysis for the Case of Romania," IZA Discussion Papers 11247, Institute of Labor Economics (IZA).
    6. Kanbur, Ravi, 2009. "Conceptualising Informality: Regulation and Enforcement," IZA Discussion Papers 4186, Institute of Labor Economics (IZA).
    7. Richard B. Freeman, 2009. "Labor Regulations, Unions, and Social Protection in Developing Countries: Market distortions or Efficient Institutions?," NBER Working Papers 14789, National Bureau of Economic Research, Inc.
    8. Basu, Arnab K. & Chau, Nancy H. & Siddique, Zahra, 2011. "Tax Evasion, Minimum Wage Non-Compliance and Informality," IZA Discussion Papers 6228, Institute of Labor Economics (IZA).
    9. Gindling, T. H. & Mossaad, Nadwa & Trejos, Juan Diego, 2014. "The Consequences of Increased Enforcement of Legal Minimum Wages in a Developing Country: An Evaluation of the Impact of the Campaña Nacional de Salarios Mínimos in Costa Rica," IZA Discussion Papers 8253, Institute of Labor Economics (IZA).
    10. Arnab K. Basu & Nancy H. Chau & Ravi Kanbur, 2015. "Contractual Dualism, Market Power and Informality," Economic Journal, Royal Economic Society, vol. 125(589), pages 1534-1573, December.
    11. Sharon Katzkowicz & Gabriela Pedetti & Martina Querejeta & Marcelo Bérgolo, 2019. "Low-Skilled Workers and the Effects of Minimum Wage: New Evidence Based on a Density-Discontinuity Approach," Working Papers PMMA 2019-10, PEP-PMMA.
    12. Gindling, T.H. & Terrell, Katherine, 2007. "The effects of multiple minimum wages throughout the labor market: The case of Costa Rica," Labour Economics, Elsevier, vol. 14(3), pages 485-511, June.
    13. ArnabK. Basu & NancyH. Chau & Ravi Kanbur, 2010. "Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws," Economic Journal, Royal Economic Society, vol. 120(543), pages 244-269, March.
    14. Leonardo Becchetti & Furio Camillo Rosati, 2007. "Global Social Preferences and the Demand for Socially Responsible Products: Empirical Evidence from a Pilot Study on Fair Trade Consumers," The World Economy, Wiley Blackwell, vol. 30(5), pages 807-836, May.
    15. Arslan Razmi, 2006. "Aspects of Informalization and Income Distribution in Developing Countries: A Modified Specific Factors Approach," UMASS Amherst Economics Working Papers 2006-03, University of Massachusetts Amherst, Department of Economics.
    16. World Bank, 2013. "Minimum Wage Policy : Lessons with a Focus on the ASEAN Region," World Bank Publications - Reports 16687, The World Bank Group.
    17. Maurizio, Roxana., 2014. "Labour formalization and declining inequality in Argentina and Brazil in the 2000s a dynamic approach," ILO Working Papers 994855153402676, International Labour Organization.
    18. Eugenia Fotoniata & Thomas Moutos, 2013. "Product Quality, Informality, and Child Labor," Review of Development Economics, Wiley Blackwell, vol. 17(2), pages 268-283, May.
    19. Yi Huang & Prakash Loungani & Gewei Wang, 2014. "Minimum wages and firm employment: evidence from China," Globalization Institute Working Papers 173, Federal Reserve Bank of Dallas.
    20. Leonardo Becchetti & Furio Camillo Rosati, 2005. "The demand for socially responsible products: empirical evidence from a pilot study on fair trade consumers," Working Papers 04, ECINEQ, Society for the Study of Economic Inequality.
    21. Neumark, David & Munguía Corella, Luis Felipe, 2021. "Do minimum wages reduce employment in developing countries? A survey and exploration of conflicting evidence," World Development, Elsevier, vol. 137(C).
    22. Paula Auerbach & María Eugenia Genoni & Carmen Pagés-Serra, 2005. "Cobertura del sistema de seguridad social y el mercado laboral en países en desarrollo," Research Department Publications 4422, Inter-American Development Bank, Research Department.
    23. repec:ilo:ilowps:485515 is not listed on IDEAS
    24. Betcherman, Gordon, 2014. "Labor market regulations : what do we know about their impacts in developing countries ?," Policy Research Working Paper Series 6819, The World Bank.
    25. Shanthi Nataraj & Francisco Perez-Arce & Krishna B. Kumar & Sinduja V. Srinivasan, 2014. "The Impact Of Labor Market Regulation On Employment In Low-Income Countries: A Meta-Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 28(3), pages 551-572, July.

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    More about this item

    Keywords

    employment effect; wage effect; minimum wage; informal sector; Brazil;
    All these keywords.

    JEL classification:

    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy

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