The Impact of Minimum Wages on Wage Inequality and Employment in the Formal and Informal Sector in Costa Rica
AbstractThis paper tests the impact of the Costa Rican minimum wage policy on wage inequality and the level of employment in the formal sector (covered by minimum wage legislation) and the informal (uncovered) sector. We also examine the redistributive effects of the minimum wage, between the covered sector and the uncovered sector. Regression analysis using micro data from the Labour Force Surveys over 17 years reveals three important findings. At the median, a unit increase in the minimum wage relative to the average wage is associated with: a) a reduction in wage inequality in the covered sector of between 0.9 percent (using the Gini) and 1.7 percent (using the Theil mean logarithmic deviation) and there is no effect on earnings inequality among the self-employed (using all measures); b) an increase in the level of covered sector employment by 0.56 percent, but no effect on the number of self-employed over time; c) an increase in the average number of hours worked per week by 0.14 percent in the covered sector and 0.34 percent in the uncovered sector. From a theoretical perspective, these finds are counter to the traditional competitive two-sector models of the minimum wage. We interpret them as supporting the monopsonistic and efficiency wage models of the labour market in those industries where the ratio of the minimum wage to the average wage ("toughness") is low but supports the traditional models in those industries where toughness is high. Given that we found overall employment to have increased, minimum wages could be seen as assisting the reallocation of labour from the traditional to the more modern sectors.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 479.
Length: 24 pages
Date of creation: 01 Apr 2001
Date of revision:
Contact details of provider:
Postal: 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109
Phone: 734 763-5020
Fax: 734 763 5850
Web page: http://www.wdi.umich.edu
More information through EDIRC
minimum wages; employment; wage inequality; monopsony; Costa Rica;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-09-28 (All new papers)
- NEP-ENT-2002-08-29 (Entrepreneurship)
- NEP-LAB-2002-09-28 (Labour Economics)
- NEP-LAM-2002-09-21 (Central & South America)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Freeman, Richard B, 1996. "The Minimum Wage as a Redistributive Tool," Economic Journal, Royal Economic Society, vol. 106(436), pages 639-49, May.
- Lawrence F. Katz & Alan B. Krueger, 1992.
"The Effect of the Minimum Wage on the Fast Food Industry,"
NBER Working Papers
3997, National Bureau of Economic Research, Inc.
- Lawrence F. Katz & Alan B. Krueger, 1992. "The effect of the minimum wage on the fast-food industry," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 46(1), pages 6-21, October.
- Katz, L.F. & Krueger, A.B., 1992. "The Effect of the Minimum Wage on the Fast Food Industry," Harvard Institute of Economic Research Working Papers 1584, Harvard - Institute of Economic Research.
- Lawrence Katz & Alan Krueger, 1992. "The Effect of the Minimum Wage on the Fast Food Industry," Working Papers 678, Princeton University, Department of Economics, Industrial Relations Section..
- Dickens, R & Machin, S & Manning, A, 1999.
"The effects of minimum wages on employment: Theory and evidence from Britain,"
Open Access publications from University College London
http://discovery.ucl.ac.u, University College London.
- Dickens, Richard & Machin, Stephen & Manning, Alan, 1999. "The Effects of Minimum Wages on Employment: Theory and Evidence from Britain," Journal of Labor Economics, University of Chicago Press, vol. 17(1), pages 1-22, January.
- Richard Dickens & Stephen Machin & Alan Manning, 1994. "The Effects of Minimum Wages on Employment: Theory and Evidence from Britain," CEP Discussion Papers dp0183, Centre for Economic Performance, LSE.
- Coulter, Fiona A E & Cowell, Frank A & Jenkins, Stephen P, 1992. "Differences in Needs and Assessment of Income Distributions," Bulletin of Economic Research, Wiley Blackwell, vol. 44(2), pages 77-124, April.
- Brown, Charles, 1999. "Minimum wages, employment, and the distribution of income," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 32, pages 2101-2163 Elsevier.
- Drobny, Andres & Wells, John, 1983. "Wages, minimum wages, and income distribution in Brazil : Results from the construction industry," Journal of Development Economics, Elsevier, vol. 13(3), pages 305-330, December.
- Fiszbein, Ariel, 1992. "Do workers in the informal sector benefit from cuts in the minimum wage?," Policy Research Working Paper Series 826, The World Bank.
- Bell, Linda A, 1997. "The Impact of Minimum Wages in Mexico and Colombia," Journal of Labor Economics, University of Chicago Press, vol. 15(3), pages S102-35, July.
- repec:fth:prinin:298 is not listed on IDEAS
- Anna Ruzik & Magdalena Rokicka, 2010. "The Gender Pay Gap in Informal Employment in Poland," CASE Network Studies and Analyses 406, CASE-Center for Social and Economic Research.
- Gindling, T. H. & Terrell, Katherine, 2004.
"The Effects of Multiple Minimum Wages Throughout the Labor Market,"
IZA Discussion Papers
1159, Institute for the Study of Labor (IZA).
- T. H. Gindling & Katherine Terrell, 2004. "The Effects of Multiple Minimum Wages Throughout the Labor Market," William Davidson Institute Working Papers Series 2004-701, William Davidson Institute at the University of Michigan.
- 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, 05.
- Leonardo Becchetti & Furio Rosati, 2007. "Global social preferences and the demand for socially responsible products: empirical evidence from a pilot study on fair trade consumers," CEIS Research Paper 90, Tor Vergata University, CEIS.
- 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.
- Lemos, Sara, 2004.
"The Effects of the Minimum Wage in the Formal and Informal Sectors in Brazil,"
IZA Discussion Papers
1089, Institute for the Study of Labor (IZA).
- Sara lemos, 2004. "The Effects of the Minimum Wage in the Formal and Informal Sectors in Brazil," Discussion Papers in Economics 04/8, Department of Economics, University of Leicester.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Laurie Gendron).
If references are entirely missing, you can add them using this form.