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The Lighthouse Effect and Beyond

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Listed:
  • Tito Boeri
  • Pietro Garibaldi
  • Marta Ribeiro

Abstract

A large body of empirical literature indicates that, contrary to predictions from economic theory, wages in the informal sector increase after a minimum wage hike. This phenomenon was so far explained as a byproduct of a signal (a lighthouse) conveyed by statutory minima to wage setting in the informal sector. A simple matching model shows that an increase in wages in the informal sector may also be induced by significant sorting and composition effects between the formal and the shadow sectors in the aftermath of the increase in the minimum wage. Using data on Brazil, we find that sorting accounts for at least one third of the increase in average wages in the informal sector after a minimum wage hike. This contribution of endogenous sorting to wage dynamics in the informal sector is also increasing over time.

Suggested Citation

  • Tito Boeri & Pietro Garibaldi & Marta Ribeiro, 2010. "The Lighthouse Effect and Beyond," Carlo Alberto Notebooks 193, Collegio Carlo Alberto.
  • Handle: RePEc:cca:wpaper:193
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    References listed on IDEAS

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    1. Amadeo, Edward Joaquim & Gill, Indermit S. & Neri, Marcelo Côrtes, 2000. "Brazil: the pressure points in labor legislation," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 395, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
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    Cited by:

    1. Miguel Á., Malo, 2017. "Labour market institutions in small Pacific island countries: Main guidelines for labour market reforms," MPRA Paper 79988, University Library of Munich, Germany.
    2. Fernando Borraz & Nicolás Gonzalez Pampillón, 2011. "Assessing the Distributive Impact of More than Doubling the Minimum Wage: The Case of Uruguay," Documentos de Trabajo (working papers) 1711, Department of Economics - dECON.
    3. Hazans, Mihails, 2011. "What Explains Prevalence of Informal Employment in European Countries: The Role of Labor Institutions, Governance, Immigrants, and Growth," IZA Discussion Papers 5872, Institute of Labor Economics (IZA).
    4. Dayioglu-Tayfur, Meltem & Kucukbayrak, Muserref & Tumen, Semih, 2020. "The Impact of Age-Specific Minimum Wages on Youth Employment and Education: A Regression Discontinuity Analysis," IZA Discussion Papers 13982, Institute of Labor Economics (IZA).
    5. Alexander Muravyev & Aleksey Oshchepkov, 2013. "Minimum wages and labor market outcomes: evidence from the emerging economy of Russia," HSE Working papers WP BRP 29/EC/2013, National Research University Higher School of Economics.
    6. Muravyev, Alexander & Oshchepkov, Aleksey, 2013. "Minimum Wages, Unemployment and Informality: Evidence from Panel Data on Russian Regions," IZA Discussion Papers 7878, Institute of Labor Economics (IZA).
    7. Mirco Tonin, 2013. "Underreporting of earnings and the minimum wage spike," IZA Journal of European Labor Studies, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 2(1), pages 1-18, December.
    8. 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).
    9. Neumark, David & Munguía Corella, Luis Felipe, 2021. "Do minimum wages reduce employment in developing countries? A survey and exploration of conflicting evidence," World Development, Elsevier, vol. 137(C).
    10. Fernando Borraz & Nicolás González-Pampillón, 2017. "Assessing the distributive effects of minimum wage," Review of Development Economics, Wiley Blackwell, vol. 21(4), pages 1081-1112, November.
    11. Ham, Andrés, 2018. "The Consequences of Legal Minimum Wages in Honduras," World Development, Elsevier, vol. 102(C), pages 135-157.
    12. Campos Vázquez, Raymundo Miguel & Rodas Milián, James Alexis, 2020. "El efecto faro del salario mínimo en la estructura salarial: evidencias para México," El Trimestre Económico, Fondo de Cultura Económica, vol. 87(345), pages 51-97, enero-mar.
    13. Hazans, Mihails, 2011. "Informal Workers across Europe: Evidence from 30 Countries," IZA Discussion Papers 5871, Institute of Labor Economics (IZA).
    14. Tito Boeri & Jan van Ours, 2013. "The Economics of Imperfect Labor Markets: Second Edition," Economics Books, Princeton University Press, edition 1, number 10142.
    15. Mansoor, Kashif & O'Neill, Donal, 2021. "Minimum wage compliance and household welfare: An analysis of over 1500 minimum wages in India," World Development, Elsevier, vol. 147(C).
    16. Pieters, Janneke, 2013. "Youth Employment in Developing Countries," IZA Research Reports 58, Institute of Labor Economics (IZA).

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    More about this item

    Keywords

    Minimum wage; Lighthouse effect; Sorting;
    All these keywords.

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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