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Behind the Lighthouse Effect

Author

Listed:
  • Boeri, Tito

    (Bocconi University)

  • Garibaldi, Pietro

    (Collegio Carlo Alberto)

  • Ribeiro, Marta

    (Universidade Catolica Portuguesa, Porto)

Abstract

A large body of empirical literature indicates that, contrary to predictions from economic theory, wages in the informal sector increase after any minimum wage hike. This phenomenon was so far explained as a byproduct of a signal conveyed by statutory minimum wages to wage setting in the informal sector, as if workers in the latter had significant bargaining power. A simple matching model shows that the lighthouse effect may be induced by significant sorting and composition effects between the formal and shadow sectors in the aftermath of the increase in the minimum wage. Using data on Brazil, we test this alternative explanation of the lighthouse effect, associated with the endogenous sorting of workers by skill in the formal and informal sectors. We find that sorting accounts for at least one third of the increase in average wages in the informal sector after the minimum wage hike. This contribution of sorting to wage dynamics in the informal sector is also increasing over time.

Suggested Citation

  • Boeri, Tito & Garibaldi, Pietro & Ribeiro, Marta, 2010. "Behind the Lighthouse Effect," IZA Discussion Papers 4890, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp4890
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    References listed on IDEAS

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    Cited by:

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    3. 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.

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    More about this item

    Keywords

    lighthouse effect; minimum wage; sorting;
    All these keywords.

    JEL classification:

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

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