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Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica

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  • T. H. Gindling

    ()

  • Katherine Terrell

    ()

Abstract

The classic dual economy models of developing countries hold minimum wages (among other institutions) accountable for persistent dualism. They note that applying or enforcing minimum wage laws in only one sector of the economy will create wage differentials which will not be eroded with labor mobility to the high wage sector. In this paper we use 12 years of micro data on thousands workers living in Costa Rica to test whether legal minimum wages have a differential impact on the wages of workers in the formal sector vs. informal sector, defined in various ways in accordance with the dual development models. The evidence from Costa Rica is contrary to the assumptions of these models. We find that increases in minimum wages not only raise the wages of workers in the urban formal sector (large urban enterprises) who are covered by minimum wage law, but they also increase the wages of all other workers covered by minimum wage legislation in what are traditionally regarded as informal sectors and where the legislation is often considered not to be enforced. Specifically, we provide evidence that minimum wages increase the wages of workers in small urban enterprises, large rural enterprises and small rural enterprises. Further, our results suggest that higher legal minimum wages raise the average wage of workers in these "informal" sectors more than in the urban formal sector. We concluded that in Costa Rica minimum wages are being enforced in the rural and small scale sectors and may actually work to reduce average wage differentials between these sectors and the urban formal sector. On the other hand, minimum wages have no significant impact on the wages of workers in another sector that is regarded as informal but which is not covered by minimum wage legislation: the self-employed workers (both urban and rural). Thus, one could argue that minimum wages may contribute to dualism between the formal and informal, defined as self-employed vs. salaried workers. However, we find no evidence of the bleaker scenario, that self-employed earnings are being lowered by minimum wages.

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Bibliographic Info

Paper provided by UMBC Department of Economics in its series UMBC Economics Department Working Papers with number 04-102.

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Length: 33 pages
Date of creation: Feb 2004
Date of revision:
Handle: RePEc:umb:econwp:04102

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Keywords: dual economy; informal sector; minimum wages; wages; Costa Rica; Latin America;

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References

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  1. Bell, Linda A, 1997. "The Impact of Minimum Wages in Mexico and Colombia," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(3), pages S102-35, July.
  2. William F. Maloney & Jairo Nunez Mendez, 2003. "Measuring the Impact of Minimum Wages: Evidence from Latin America," NBER Working Papers 9800, National Bureau of Economic Research, Inc.
  3. Pablo Fajnzylber, 2001. "Minimum Wage Effects Throughout the Wage Distribution: Evidence from Brazil's Formal and Informal Sectors," Anais do XXIX Encontro Nacional de Economia [Proceedings of the 29th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Gr 098, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  4. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, Elsevier, vol. 2(2), pages 165-187, June.
  5. Lustig, N. & Mcleod, D., 1996. "Minimum Wages and Poverty in Developing Countries : Some Empirical Evidence," Papers, Brookings Institution - Working Papers 125, Brookings Institution - Working Papers.
  6. Alida Castillo-Freeman & Richard B. Freeman, 1992. "When the Minimum Wage Really Bites: The Effect of the U.S.-Level Minimum on Puerto Rico," NBER Chapters, National Bureau of Economic Research, Inc, in: Immigration and the Workforce: Economic Consequences for the United States and Source Areas, pages 177-212 National Bureau of Economic Research, Inc.
  7. Sara Lemos, 2004. "The Effects Of The Minimum Wage On Wages And Employment In Brazil - A Menu Of Minimum Wage Variables," Labor and Demography, EconWPA 0403008, EconWPA.
  8. Harrison, Ann E & Leamer, Edward, 1997. "Labor Markets in Developing Countries: An Agenda for Research," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 15(3), pages S1-19, July.
  9. Ranis, Gustav & Stewart, Frances, 1999. "V-Goods and the Role of the Urban Informal Sector in Development," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 47(2), pages 259-88, January.
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Cited by:
  1. Dinkelman, Taryn & Ranchhod, Vimal, 2011. "Evidence on the impact of minimum wage laws in an informal sector: Domestic workers in South Africa," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8682, C.E.P.R. Discussion Papers.
  2. Juergen Jung & Chung Tran, 2011. "The Extension of Social Security Coverage in Developing Countries," Working Papers, Towson University, Department of Economics 2011-06, Towson University, Department of Economics, revised Nov 2011.
  3. Alaniz, Enrique & Gindling, T. H. & Terrell, Katherine, 2011. "The Impact of Minimum Wages on Wages, Work and Poverty in Nicaragua," IZA Discussion Papers 5702, Institute for the Study of Labor (IZA).
  4. ArnabK. Basu & NancyH. Chau & Ravi Kanbur, 2010. "Turning a Blind Eye: Costly Enforcement, Credible Commitment and Minimum Wage Laws," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 120(543), pages 244-269, 03.
  5. Alejandro Arrieta & Ariadna García Prado & Giota Panopoulou, 2012. "Enrolling the Self-Employed in Mandatory Health Insurance in Colombia: are we missing other factors?," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra, Departamento de Economía - Universidad Pública de Navarra 1213, Departamento de Economía - Universidad Pública de Navarra.
  6. Maxim Bouev, 2005. "State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan wp764, William Davidson Institute at the University of Michigan.
  7. Boeri, Tito & Garibaldi, Pietro & Ribeiro, Marta, 2010. "Behind the Lighthouse Effect," IZA Discussion Papers 4890, Institute for the Study of Labor (IZA).
  8. Paul Ferraro & Merlin Hanauer, 2011. "Protecting Ecosystems and Alleviating Poverty with Parks and Reserves: ‘Win-Win’ or Tradeoffs?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 48(2), pages 269-286, February.
  9. Jesús Crespo-Cuaresma & Balázs Égert & Thomas Reininger, 2004. "Interest Rate Pass-Through in New EU Member States: The Case of the Czech Republic, Hungary and Poland," William Davidson Institute Working Papers Series, William Davidson Institute at the University of Michigan 2004-671, William Davidson Institute at the University of Michigan.

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