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Estimating the effects of the minimum wage in a developing country: A density discontinuity design approach

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  • Hugo Jales

Abstract

This paper proposes a framework to identify the effects of the minimum wage on the joint distribution of sector and wage in a developing country. I show how the discontinuity of the wage distribution around the minimum wage identifies the extent of noncompliance with the minimum wage policy, and how the conditional probability of sector given wage recovers the relationship between latent sector and wages. I apply the method in the “PNAD,” a nationwide representative Brazilian cross‐sectional dataset for the years 2001–2009. The results indicate that the size of the informal sector is increased by around 39% compared to what would prevail in the absence of the minimum wage, an effect attributable to (i) unemployment effects of the minimum wage on the formal sector and (ii) movements of workers from the formal to the informal sector as a response to the policy.

Suggested Citation

  • Hugo Jales, 2018. "Estimating the effects of the minimum wage in a developing country: A density discontinuity design approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(1), pages 29-51, January.
    • Handle: RePEc:wly:japmet:v:33:y:2018:i:1:p:29-51
    DOI: 10.1002/jae.2586
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    Cited by:

    1. Samutpradit, Saisawat, 2024. "Employment effects of minimum wages in a dual economy: Evidence from Thailand," Journal of Development Economics, Elsevier, vol. 168(C).
    2. 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).
    3. 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.
    4. 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.
    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 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. Bertanha, Marinho & McCallum, Andrew H. & Seegert, Nathan, 2023. "Better bunching, nicer notching," Journal of Econometrics, Elsevier, vol. 237(2).
    9. Carlo Lombardo & Lucía Ramírez Leira & Leonardo Gasparini, 2024. "Does the Minimum Wage Affect Wage Inequality? A Study for the Six Largest Latin American Economies," Journal of Development Studies, Taylor & Francis Journals, vol. 60(4), pages 494-510, April.
    10. Fernandez Sierra, Manuel & Serrano, Gabriela, 2022. "New Perspectives on Inequality in Latin America," IZA Discussion Papers 15437, Institute of Labor Economics (IZA).
    11. Nicolas Gonzalez-Pampillon & Javier Vazquez-Grenno, 2025. "Minimum wages and low wage workers: Compliance as non-employment margin," CEP Discussion Papers dp2096, Centre for Economic Performance, LSE.
    12. 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).
    13. 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.
    14. 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.
    15. 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).
    16. Nicolás González-Pampillón & Javier Vázquez-Grenno & Universitat de Barcelona & IEB, 2025. "Minimum wages and low wage workers: Compliance asnon-employment margin," Working Papers 2025/06, Institut d'Economia de Barcelona (IEB).
    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. Marinho Bertanha & Andrew H. McCallum & Alexis Payne & Nathan Seegert, 2022. "Bunching estimation of elasticities using Stata," Stata Journal, StataCorp LLC, vol. 22(3), pages 597-624, September.
    20. 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.
    21. 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).
    22. 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.
    23. Derenoncourt, Ellora & Gerard, Francois & Lagos, Lorenzo & Montialoux, Claire, 2025. "Minimum Wages and Informality," IZA Discussion Papers 18234, Institute of Labor Economics (IZA).
    24. Carranza, Eliana & Saliola, Federica & Packard, Truman, 2025. "Regulating Markets So More People Find Better Jobs," Social Protection Discussion Papers and Notes 197248, The World Bank.
    25. 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.

    More about this item

    JEL classification:

    • J00 - Labor and Demographic Economics - - General - - - 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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