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Estimating the Effects of Minimum Wage in a Developing Country: A Density Discontinuity Design Approach

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  • Jales, Hugo

Abstract

This paper proposes a new framework to empirically assess the effects of the minimum wage in a developing country. This approach allows us to jointly estimate the effects of the minimum wage on unemployment, average wages, sector mobility, wage inequality, the size of the informal sector and on labor tax revenues. I show that under reasonable assumptions, cross-sectional data on the worker's wage and sector status can identify the joint distribution of the latent counterparts of these variables; that is, the sector status and wage that would prevail in the absence of the minimum wage. I also identify parameters that govern how the minimum wage affects the economy. My identification strategy, building on Doyle (2006), specifies a parametric form for the conditional distribution of sector status, given wage. I show how the discontinuity of the wage distribution around the minimum wage identifies the extent of non-compliance with the minimum wage policy, and how the conditional probability of sector status given wage recovers the relationship between latent sector status and wages. I apply the method in the “PNAD†, a nationwide representative Brazilian cross-sectional dataset from years 2001 to 2009. I show on the application that the assumptions used are not violated in the context of the Brazilian labor market. The results show that the size of the informal sector is increased by around 46% when compared to the scenario in the absence of the minimum wage. This result is driven by both two sources: (i) unemployment effects on the formal sector, (ii) movements of workers from the formal to the informal sector as a unintended consequence of the policy. In addition, the minimum wage legislation strongly affects wage inequality, reducing up to 20% the standard deviation of log-wages, and reduces revenues from labor taxes up to 15%.

Suggested Citation

  • Jales, Hugo, 2014. "Estimating the Effects of Minimum Wage in a Developing Country: A Density Discontinuity Design Approach," CLSSRN working papers clsrn_admin-2014-45, Vancouver School of Economics, revised 24 Oct 2014.
    • Handle: RePEc:ubc:clssrn:clsrn_admin-2014-45
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    References listed on IDEAS

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    1. Carlos Henrique Corseuil & Miguel Foguel & Marcos Hecksher, 2013. "Efeitos dos Pisos salariais Estaduais Sobre o Mercado de Trabalho: Uma Nova Abordagem Empírica," Discussion Papers 1887, Instituto de Pesquisa Econômica Aplicada - IPEA.
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    Cited by:

    1. Jales, Hugo & Jiang, Boqian & Rosenthal, Stuart S., 2023. "JUE Insight: Using the mode to test for selection in city size wage premia," Journal of Urban Economics, Elsevier, vol. 133(C).
    2. Gindling, T. H. & Ronconi, Lucas, 2023. "Minimum Wage Policy and Inequality in Latin America and the Caribbean," IDB Publications (Working Papers) 12931, Inter-American Development Bank.
    3. Du, Pengcheng & Wang, Shuxun, 2020. "The effect of minimum wage on firm markup: Evidence from China," Economic Modelling, Elsevier, vol. 86(C), pages 241-250.
    4. David A. Green, 2014. "What Is a Minimum Wage For? Empirical Results and Theories of Justice," Canadian Public Policy, University of Toronto Press, vol. 40(4), pages 293-314, December.
    5. Sebastian Fossati & Joseph Marchand, 2024. "First to $15: Alberta’s Minimum Wage Policy on Employment by Wages, Ages, and Places," ILR Review, Cornell University, ILR School, vol. 77(1), pages 119-142, January.
    6. Jales, Hugo & Ma, Jun & Yu, Zhengfei, 2017. "Optimal bandwidth selection for local linear estimation of discontinuity in density," Economics Letters, Elsevier, vol. 153(C), pages 23-27.
    7. Pierre Brochu & David A. Green & James Townsend & Thomas Lemieux, 2023. "The minimum wages, turnover, and the shape of the wage distribution," IFS Working Papers W23/32, Institute for Fiscal Studies.
    8. Fossati, Sebastian & Marchand, Joseph, 2020. "First to $15: Alberta's Minimum Wage Policy on Employment by Wages, Ages, and Places," Working Papers 2020-15, University of Alberta, Department of Economics, revised 27 Jul 2023.
    9. Marinho Bertanha & Andrew H. McCallum & Nathan Seegert, 2021. "Better Bunching, Nicer Notching," Papers 2101.01170, arXiv.org, revised Jun 2023.
    10. Marinho Bertanha & Andrew H. McCallum & Alexis Payne & Nathan Seegert, 2022. "Bunching estimation of elasticities using Stata," Stata Journal, StataCorp LP, vol. 22(3), pages 597-624, September.
    11. Manuel Fernández & Gabriela Serrano, 2022. "New Perspectives on Inequality in Latin America," Documentos CEDE 20295, Universidad de los Andes, Facultad de Economía, CEDE.
    12. Carlo Lombardo & Lucía Ramirez-Veira & Leonardo Gasparini, 2022. "Does the Minimum Wage Affect Wage Inequality? A Study for the Six Largest Latin American Economies," CEDLAS, Working Papers 0302, CEDLAS, Universidad Nacional de La Plata.
    13. Katzkowicz, Sharon & Pedetti, Gabriela & Querejeta, Martina & Bergolo, Marcelo, 2021. "Low-skilled workers and the effects of minimum wage in a developing country: Evidence based on a density-discontinuity approach," World Development, Elsevier, vol. 139(C).
    14. Darius Daniel Martin, 2021. "The Minimum Wage in a Roy Model with Monopsony," Journal of Labor Research, Springer, vol. 42(3), pages 358-381, December.
    15. Stijn Broecke & Alessia Forti & Marieke Vandeweyer, 2017. "The effect of minimum wages on employment in emerging economies: a survey and meta-analysis," Oxford Development Studies, Taylor & Francis Journals, vol. 45(3), pages 366-391, July.
    16. Du, Pengcheng & Zheng, Yi & Wang, Shuxun, 2022. "The minimum wage and the financialization of firms: Evidence from China," China Economic Review, Elsevier, vol. 76(C).
    17. Saraçoğlu, Dürdane Şirin, 2020. "Do labour market policies reduce the informal economy more effectively than enforcement and deterrence?," Journal of Policy Modeling, Elsevier, vol. 42(3), pages 679-698.
    18. 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.
    19. Işık Enes & Orhangazi Özgür & Tekgüç Hasan, 2020. "Heterogeneous effects of minimum wage on labor market outcomes: A case study from Turkey," IZA Journal of Labor Policy, Sciendo & Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 10(1), pages 1-41, March.
    20. Howell, Anthony, 2020. "Minimum wage impacts on Han-minority Workers’ wage distribution and inequality in urban china," Journal of Urban Economics, Elsevier, vol. 115(C).
    21. Marcelo Castro & Cesar Tirso, 2023. "The impacts of the age of majority on the exposure to violent crimes," Empirical Economics, Springer, vol. 64(2), pages 983-1023, February.

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    More about this item

    Keywords

    Minimum Wage; Informality; Unemployment; Density Discontinuity; Design; Wage Inequality; Labor Tax Revenues; Formal Sector;
    All these keywords.

    JEL classification:

    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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