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Do workers in the informal sector benefit from cuts in the minimum wage?

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  • Fiszbein, Ariel

Abstract

This paper analyzes the effect of a change in the minimum wage on the earnings of workers in the informal sector, who supposedly are not covered by minimum wage legislation. The standard view of the matter is that a reduction of the minimum wage, which increases employment in the formal sector, reduces the effective supply of labor to the informal sector increasing the wage at which the latter clears. Strong policy conclusions can be - and have been - derived from the standard view. Given that workers in the informal sector earn less than those in the formal sector, a reduction in the minimum wage should reduce income inequality between workers in the two sectors. Also, to the extent that most of the urban poor work in the informal sector, reducing the minimum wage could be an effective anti-poverty policy. This paper explores the possibility of a non-standard result following a different avenue. It discusses the role of labor reallocation and demand factors in determining the relationship between minimum wages and informal sector earnings.

Suggested Citation

  • Fiszbein, Ariel, 1992. "Do workers in the informal sector benefit from cuts in the minimum wage?," Policy Research Working Paper Series 826, The World Bank.
    • Handle: RePEc:wbk:wbrwps:826
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    2. Patrick Belser & Uma Rani, 2015. "Minimum wages and inequality," Chapters, in: Janine Berg (ed.), Labour Markets, Institutions and Inequality, chapter 5, pages 123-146, Edward Elgar Publishing.
    3. Gindling, T.H. & Terrell, Katherine, 2005. "The effect of minimum wages on actual wages in formal and informal sectors in Costa Rica," World Development, Elsevier, vol. 33(11), pages 1905-1921, November.
    4. Meltem Dayioglu & Müşerref Küçükbayrak & Semih Tumen, 2022. "The impact of age-specific minimum wages on youth employment and education: a regression discontinuity analysis," International Journal of Manpower, Emerald Group Publishing Limited, vol. 43(6), pages 1352-1377, March.
    5. Uma Rani, 2017. "Minimum Wage Policies and Their Effects in Developing Countries: A Comparative Perspective," The Indian Journal of Labour Economics, Springer;The Indian Society of Labour Economics (ISLE), vol. 60(1), pages 33-55, March.
    6. Fatma El-Hamidi & Katherine Terrell, 2002. "The Impact of Minimum Wages on Wage Inequality and Employment in the Formal and Informal Sector in Costa Rica," International Economic Association Series, in: Richard B. Freeman (ed.), Inequality Around the World, chapter 8, pages 188-203, Palgrave Macmillan.
    7. Nora Lustig & Darryl McLeod, 1995. "Salario mínimo y pobreza: un análisis de corte transversal para países en desarrollo," Coyuntura Social 13219, Fedesarrollo.
    8. Grimshaw, Damian. & Miozzo, Marcela., 2003. "Minimum wages and pay equity in Latin America : identifying the employment and pay equity effects," ILO Working Papers 993617183402676, International Labour Organization.

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