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

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  • Fiszbein, Ariel
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    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.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 826.

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    Date of creation: 31 Jan 1992
    Handle: RePEc:wbk:wbrwps:826
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    Keywords: Banks&Banking Reform; Environmental Economics&Policies; Poverty Assessment; Health Economics&Finance; Economic Theory&Research;

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    1. François Bourguignon, 1990. "Growth and Inequality in the Dual Model of Development: The Role of Demand Factors," Review of Economic Studies, Oxford University Press, vol. 57(2), pages 215-228.
    2. Lopez, Ramon E. & Riveros, Luis A., 1989. "Macroeconomic adjustment and the labor market in four Latin American countries," Policy Research Working Paper Series 335, The World Bank.
    3. Stiglitz, Joseph E., 1988. "Economic organization, information, and development," Handbook of Development Economics,in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 1, chapter 5, pages 93-160 Elsevier.
    4. Santos Alvite, Eduardo, 1989. "Poverty in Ecuador," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), August.
    5. Raaj Kumar Sah & Joseph E. Stiglitz, 1983. "The Economics of Price Scissors," NBER Working Papers 1156, National Bureau of Economic Research, Inc.
    6. Edward M. Gramlich, 1976. "Impact of Minimum Wages on Other Wages, Employment, and Family Incomes," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(2), pages 409-462.
    7. Mincer, Jacob, 1976. "Unemployment Effects of Minimum Wages," Journal of Political Economy, University of Chicago Press, vol. 84(4), pages 87-104, August.
    8. Chaudhuri, Tamal Datta, 1989. "A theoretical analysis of the informal sector," World Development, Elsevier, vol. 17(3), pages 351-355, March.
    9. Sebastian Edwards & Alejandra Cox Edwards, 1990. "Labor Market Distortions and Structural Adjustments in Developing Countries," NBER Working Papers 3346, National Bureau of Economic Research, Inc.
    10. Fallon, Peter R. & Riveros, Luis A., 1989. "Adjustment and the labor market," Policy Research Working Paper Series 214, The World Bank.
    11. Cole, William E & Sanders, Richard D, 1985. "Internal Migration and Urban Employment in the Third World," American Economic Review, American Economic Association, vol. 75(3), pages 481-494, June.
    12. Tokman, Víctor E., 1978. "Informal-formal sector interrelationships," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), June.
    13. Berry, A. & Sabot, R. H., 1978. "Labour market performance in developing countries: A survey," World Development, Elsevier, vol. 6(11-12), pages 1199-1242.
    14. Tokman, Víctor E., 1988. "Urban employment: research and policy in Latin America," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    15. Johnson, William R & Browning, Edgar K, 1983. "The Distributional and Efficiency Effects of Increasing the Minimum Wage: A Simulation," American Economic Review, American Economic Association, vol. 73(1), pages 204-211, March.
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    Cited by:

    1. 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.
    2. Nora Lustig & Darryl McLeod, 1995. "Salario mínimo y pobreza: un análisis de corte transversal para países en desarrollo," COYUNTURA SOCIAL 013219, FEDESARROLLO.
    3. Katherine Terrell & Fatma El Hamidi, 2001. "The Impact of Minimum Wages on Wage Inequality and Employment in the Formal and Informal Sector in Costa Rica," William Davidson Institute Working Papers Series 479, William Davidson Institute at the University of Michigan.

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