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Minimum Wage Effects under Endogenous Compliance: Evidence from Peru


  • Miguel Jaramillo Baanante

    (Grupo de Análisis para el Desarrollo. GRADE)


Latin American labor markets feature large informal sectors. In practice, however, the simple duality formal-informal has many different shades: firms tend to comply more with certain legislation than with other. Recent evidence has suggested that minimum wages have significant effects on the informal sector (Bell (1997) for Mexico; Gindling and Terrell (2004) for Costa Rica; Lemos (2004) and Fajnzylver (2001) for Brazil; and Maloney and Nuñez (2004) for Colombia). Further, some of this evidence suggests effects throughout a large part of the wage distribution. This has been interpreted as evidence of ‘lighthouse’ or numeraire effects. We test this hypothesis using panel data from Peru to identify effects throughout the wage distribution. Although there are some effects on informal sector workers, overall results provide little support for numeraire or ‘lighthouse’ effects. Labor monthly earnings are affected only at the bottom of the distribution (0.25-0.60 of the minimum wage), made up mostly of informal workers, and for formal workers earning between the old the new minima. Negative effects on the probability of retaining employed status after a minimum wage shock are either weak or non significant for wage earners below the minimum wage, but significant for formal workers ‘trapped’ between minima, and for both formal and informal earning between 1.2 and 2 times the minimum wage. Independent workers earning below minimum suffer negative effects on both earnings and employment.

Suggested Citation

  • Miguel Jaramillo Baanante, 2004. "Minimum Wage Effects under Endogenous Compliance: Evidence from Peru," Económica, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata, vol. 0(1-2), pages 85-123, January-D.
  • Handle: RePEc:lap:journl:539

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    Cited by:

    1. repec:ilo:ilowps:478309 is not listed on IDEAS
    2. Nidhiya Menon & Yana van der Meulen Rodgers, 2017. "The Impact of the Minimum Wage on Male and Female Employment and Earnings in India," Asian Development Review, MIT Press, vol. 34(1), pages 28-64, March.
    3. Martin Schindler & Mariya Aleksynska, 2011. "Labor Market Regulations in Low-, Middle- and High-Income Countries; A New Panel Database," IMF Working Papers 11/154, International Monetary Fund.
    4. Larrain, Mauricio & Poblete, Joaquin, 2007. "Age-differentiated minimum wages in developing countries," Journal of Development Economics, Elsevier, vol. 84(2), pages 777-797, November.

    More about this item


    Minimum wages; informal and formal employment; institutions;

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements


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