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The Impact of Minimum Wages on Wage Inequality and Employment in the Formal and Informal Sector in Costa Rica

Author

Listed:
  • Katherine Terrell
  • Fatma El Hamidi
Abstract
This paper tests the impact of the Costa Rican minimum wage policy on wage inequality and the level of employment in the formal sector (covered by minimum wage legislation) and the informal (uncovered) sector. We also examine the redistributive effects of the minimum wage, between the covered sector and the uncovered sector. Regression analysis using micro data from the Labour Force Surveys over 17 years reveals three important findings. At the median, a unit increase in the minimum wage relative to the average wage is associated with: a) a reduction in wage inequality in the covered sector of between 0.9 percent (using the Gini) and 1.7 percent (using the Theil mean logarithmic deviation) and there is no effect on earnings inequality among the self-employed (using all measures); b) an increase in the level of covered sector employment by 0.56 percent, but no effect on the number of self-employed over time; c) an increase in the average number of hours worked per week by 0.14 percent in the covered sector and 0.34 percent in the uncovered sector. From a theoretical perspective, these finds are counter to the traditional competitive two-sector models of the minimum wage. We interpret them as supporting the monopsonistic and efficiency wage models of the labour market in those industries where the ratio of the minimum wage to the average wage ("toughness") is low but supports the traditional models in those industries where toughness is high. Given that we found overall employment to have increased, minimum wages could be seen as assisting the reallocation of labour from the traditional to the more modern sectors.

Suggested Citation

  • 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.
    • Handle: RePEc:wdi:papers:2001-479
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    References listed on IDEAS

    as
    1. Lawrence Katz & Alan Krueger, 1992. "The Effect of the Minimum Wage on the Fast Food Industry," Working Papers 678, Princeton University, Department of Economics, Industrial Relations Section..
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    Citations

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    Cited by:

    1. Kertesi, Gábor & Köllő, János, 2004. "A 2001. évi minimálbér-emelés foglalkoztatási következményei [The employment consequences of the 2001 rise in the minimum wage]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 293-324.
    2. Lemos, Sara, 2009. "Minimum wage effects in a developing country," Labour Economics, Elsevier, vol. 16(2), pages 224-237, April.
    3. T. H. Gindling & Katherine Terrell, 2004. "The Effects of Multiple Minimum Wages Throughout the Labor Market," William Davidson Institute Working Papers Series 2004-701, William Davidson Institute at the University of Michigan.
    4. Gindling, T.H. & Terrell, Katherine, 2007. "The effects of multiple minimum wages throughout the labor market: The case of Costa Rica," Labour Economics, Elsevier, vol. 14(3), pages 485-511, June.
    5. Leonardo Becchetti & Furio Camillo Rosati, 2007. "Global Social Preferences and the Demand for Socially Responsible Products: Empirical Evidence from a Pilot Study on Fair Trade Consumers," The World Economy, Wiley Blackwell, vol. 30(5), pages 807-836, May.
    6. Mr. Christopher S Adam & Mr. Edward F Buffie, 2020. "The Minimum Wage Puzzle in Less Developed Countries: Reconciling Theory and Evidence," IMF Working Papers 2020/023, International Monetary Fund.
    7. Margherita Comola & Luiz de Mello, 2009. "How Does Decentralised Minimum-Wage Setting Affect Unemployment and Informality?: The Case of Indonesia," OECD Economics Department Working Papers 710, OECD Publishing.
    8. Chau, Nancy H & Kanbur, Ravi & Soundararajan, Vidhya, 2022. "Employer Power and Employment in Developing Countries," CEPR Discussion Papers 17548, C.E.P.R. Discussion Papers.
    9. Anna Ruzik & Magdalena Rokicka, 2010. "The Gender Pay Gap in Informal Employment in Poland," CASE Network Studies and Analyses 406, CASE-Center for Social and Economic Research.
    10. Pérez Pérez, Jorge, 2020. "The minimum wage in formal and informal sectors: Evidence from an inflation shock," World Development, Elsevier, vol. 133(C).
    11. Haroon Bhorat & Tara Caetano & Benjamin Jourdan & Ravi Kanbur & Christopher Rooney & Benjamin Stanwix & Ingrid Woolard, 2016. "Investigating the Feasibility of a National Minimum Wage for South Africa," Working Papers 201601, University of Cape Town, Development Policy Research Unit.
    12. Leonardo Becchetti & Furio Camillo Rosati, 2005. "The demand for socially responsible products: empirical evidence from a pilot study on fair trade consumers," Working Papers 04, ECINEQ, Society for the Study of Economic Inequality.
    13. Sara lemos, 2004. "The Effects of the Minimum Wage in the Formal and Informal Sectors in Brazil," Discussion Papers in Economics 04/8, Division of Economics, School of Business, University of Leicester.

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    Keywords

    minimum wages; employment; wage inequality; monopsony; Costa Rica;
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