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The Lighthouse Effect and Beyond

Author

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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    File URL: http://www.carloalberto.org/assets/working-papers/no.193.pdf
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    References listed on IDEAS

    as
    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, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
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    Citations

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    Cited by:

    1. Hazans, Mihails, 2011. "What explains prevalence of informal employment in European countries : the role of labor institutions, governance, immigrants, and growth," Policy Research Working Paper Series 5917, The World Bank.
    2. 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.
    3. repec:bla:rdevec:v:21:y:2017:i:4:p:1081-1112 is not listed on IDEAS
    4. 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.
    5. 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.
    6. repec:eee:wdevel:v:102:y:2018:i:c:p:135-157 is not listed on IDEAS
    7. Hazans, Mihails, 2011. "Informal Workers across Europe: Evidence from 30 Countries," IZA Discussion Papers 5871, Institute for the Study of Labor (IZA).
    8. 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.
    9. 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.
    10. Muravyev, Alexander & Oshchepkov, Aleksey, 2013. "Minimum Wages, Unemployment and Informality: Evidence from Panel Data on Russian Regions," IZA Discussion Papers 7878, Institute for the Study of Labor (IZA).
    11. Janneke Pieters, 2015. "Youth Employment in Developing Countries," Working Papers id:7291, eSocialSciences.

    More about this item

    Keywords

    Minimum wage; Lighthouse effect; Sorting;

    JEL classification:

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

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