William Davidson Institute Working Paper 479
Our empirical estimates are hence consistent with the view that the minimum wage increases
assist in reallocating labour from the “traditional” to the “modern” sector in the spirit of the Lewis
model. The high wage (modern sector) firms would not raise wages and employment unless
induced to do so by the minimum wage increase. The low wage (traditional sector) firms in turn
release labour that migrates to the expanding high wage (modern) sector. The story is appealing but
needs fine tuning in terms of explaining skill compatibility between the two sectors.
Turning to our findings on the impact of minimum wages on the number of hours worked in an
average week, we find that up to a point, increases in the minimum wage are positively correlated
with the toughness of the minimum wage in both the covered and uncovered sector (Table 5).
Moreover, the impact is much greater (and more highly significant) among the self-employed
workers. Whereas at the lowest toughness level a one percentage point increase in toughness
increases number of hours worked by covered sector workers by 0.4 percent, it increases the
number of hours worked in self-employment by 1.2 percent see Table 6). Hence, although the
number of self-employed workers do not change with changes in the minimum wage relative to
average wage, the number of hours of the self-employed do change. As with the impact on
employment, once the minimum wage toughness reaches 66 to71 percent of the average wage in the
industry, the number of hours worked in the covered sectors begins to fall and at the highest level it
falls by 0.2 percent in the covered sector and 0.8 percent among the self employed. Tests for longer
term effects show that the estimated coefficients on one year lagged toughness variable are not
significant when entered in addition to the current measure of toughness.
3.4 Reallocation of workers between the covered and uncovered sector, within an industry
Our analysis of the allocation of workers between the covered and uncovered sectors within
an industry indicates that as minimum wages rise relative to average wages in an industry, the