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Does the Minimum Wage Have a Higher Impact on the Informal than on the Formal Labor Market? Evidence from Quasi-Experiments

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  • Khamis, Melanie

    () (Wesleyan University)

Abstract

This paper investigates a puzzle in the literature on labor markets in developing countries: labor legislations not only have an impact on the formal labor market but also an impact on the informal sector. It has even been argued that the impact on the informal sector in the case of the minimum wage is stronger than on the formal sector. Using quasi-experiments of minimum wage changes and thereby exploiting geographical variation of the minimum wage bite, I find evidence for this hypothesis. Informal workers, workers without social security contribution, experienced significant wage increases when the minimum wage was raised while formal workers did not. This result highlights that non-compliance with one labor legislation, the social security contribution, does not necessarily imply non-compliance to other labor laws such as the minimum wage.

Suggested Citation

  • Khamis, Melanie, 2008. "Does the Minimum Wage Have a Higher Impact on the Informal than on the Formal Labor Market? Evidence from Quasi-Experiments," IZA Discussion Papers 3911, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp3911
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    References listed on IDEAS

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    1. 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.
    2. T.H. Gindling & Katherine Terrell, 2004. "Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica," William Davidson Institute Working Papers Series 2004-647, William Davidson Institute at the University of Michigan.
    3. Sara Lemos, 2004. "A Menu Of Minimum Wage Variables For Evaluating Wages and Employment Effects: Evidence From Brazil," Labor and Demography 0403009, University Library of Munich, Germany.
    4. Alatas, Vivi & Cameron, Lisa, 2003. "The impact of minimum wages on employment in a low income country : an evaluation using the difference-differences approach," Policy Research Working Paper Series 2985, The World Bank.
    5. Derk Bienen, 2002. "Mindestlohnreformen in Südamerika – ökonomische Rechtfertigung und praktische Umsetzung," Ibero America Institute for Econ. Research (IAI) Discussion Papers 090, Ibero-America Institute for Economic Research.
    6. Alida Castillo Freeman & Richard B. Freeman, 1991. "Minimum Wages in Puerto Rico: Textbook Case of a Wage Floor?," NBER Working Papers 3759, National Bureau of Economic Research, Inc.
    7. T. H. Gindling & Katherine Terrell, 2004. "Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica," UMBC Economics Department Working Papers 04-102, UMBC Department of Economics.
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    Cited by:

    1. Haroon Bhorat & Ravi Kanbur & Benjamin Stanwix, 2017. "Minimum Wages in Sub-Saharan Africa: A Primer," World Bank Research Observer, World Bank Group, vol. 32(1), pages 21-74.
    2. Groisman, Fernando & Boffi, Santiago & Calero, Analía & Cuba, María Soledad & Liniado, Julia & Sconfienza, María Eugenia & Vergara Parra, Albano, 2015. "Social protection to the informal sector: the role of minimum wage and income transfer policies," MPRA Paper 72822, University Library of Munich, Germany.
    3. Davidescu, Adriana Anamaria & Schneider, Friedrich, 2017. "Nature of the Relationship between Minimum Wage and the Shadow Economy Size: An Empirical Analysis for the Case of Romania," IZA Discussion Papers 11247, Institute for the Study of Labor (IZA).
    4. Matteo G. Richiardi, 2015. "Liberia.Expanding formal employment through labour market reforms," LABORatorio R. Revelli Working Papers Series 144, LABORatorio R. Revelli, Centre for Employment Studies.
    5. repec:bla:rdevec:v:21:y:2017:i:4:p:1081-1112 is not listed on IDEAS
    6. 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.
    7. Attakrit Leckcivilize, 2015. "Does the minimum wage reduce wage inequality? Evidence from Thailand," IZA Journal of Labor & Development, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-23, December.
    8. 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.
    9. repec:eee:wdevel:v:102:y:2018:i:c:p:135-157 is not listed on IDEAS
    10. Tony Fang & Carl Lin, 2015. "Minimum wages and employment in China," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 4(1), pages 1-30, December.
    11. Patrick Belser & Uma Rani, 2015. "Minimum wages and inequality," Chapters,in: Labour Markets, Institutions and Inequality, chapter 5, pages 123-146 Edward Elgar Publishing.
    12. Fernando Borraz & Nicolás González, 2009. "Minimum Wage: Empirical evidence for Uruguay," Documentos de trabajo 2009003, Banco Central del Uruguay.
    13. Belser, Patrick. & Rani, Uma., 2010. "Extending the coverage of minimum wages in India : simulations from household data," ILO Working Papers 994584553402676, International Labour Organization.
    14. Casanova, Luis. & Jiménez, Maribel. & Jiménez, Mónica., 2015. "Calidad del empleo y cumplimiento del salario mínimo en Argentina," ILO Working Papers 994891263402676, International Labour Organization.
    15. Melanie Khamis, 2012. "A Note On Informality In The Labour Market," Journal of International Development, John Wiley & Sons, Ltd., vol. 24(7), pages 894-908, October.
    16. Casanova, Luis. & Alejo, Javier., 2015. "El efecto de la negociación colectiva sobre la distribución de los ingresos laborales evidencia empírica para Argentina en los años dos mil," ILO Working Papers 994875473402676, International Labour Organization.
    17. Mauricio Vargas & Santiago Garriga, 2015. "Explaining Inequality and Poverty Reduction in Bolivia," IMF Working Papers 15/265, International Monetary Fund.
    18. 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.
    19. 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).
    20. Julián Martinez Correa & Carlo Lombardo & Belén Bentivegna, 2018. "Convenio Colectivo, Sindicatos y Dispersión Salarial: Evidencia de Argentina," CEDLAS, Working Papers 0232, CEDLAS, Universidad Nacional de La Plata.
    21. Demombynes, Gabriel & Metzler, Johannes, 2008. "Connecting the unobserved dots : a decomposition analysis of changes in earnings inequality in urban Argentina, 1980-2002," Policy Research Working Paper Series 4624, The World Bank.
    22. Calavrezo, Oana & Pelek, Selin, 2011. "Qui sont les salariés payés au niveau du salaire minimum? Une analyse empirique à partir de données turques," GIAM Working Papers 11-2, Galatasaray University Economic Research Center, revised 13 Feb 2011.

    More about this item

    Keywords

    minimum wages; quasi-experiments; informal economy;

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets

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