William Davidson Institute Working Paper 479
percentage of workers in the covered sector will rise (see Table 7). The short-run impact is
marginally statistically significant (with P value of 0.113) and indicates a linear effect of 0.19
percent increase in the percentage of covered sector workers. This of course relates to the findings
in Table 1, where increases in the toughness of the minimum wage increases the number of covered
sector workers (up to a point) but seems to leave the number of self employed unchanged.
However, we also have the interesting finding that the coefficient on the lagged value of toughness
is significant (at the five percent level) and indicates that a one percentage point increase in
toughness in one year will raise the percent of workers in the covered sector by 0.29 percent in the
following year. Hence the redistribution of labour from the informal to the formal sector within
each industry, brought about by increases in the minimum wage, is significant and long term. This
is counter to the traditional view that increases in the minimum wage enlarge the informal sector.
4. SUMMARY AND CONCLUSIONS
The purpose of this paper is to test whether the Costa Rican government is reaching its
goal of reducing wage inequality while at the same time not reducing significantly the level of
employment in the covered sector with the use of a complicated minimum wage policy. We also
examine the redistributive effects of the minimum wage between the covered and the uncovered
(self-employed) sectors.
Costa Rica has a complex system of minimum wages that are industry and occupation
specific. Over the 1980s and 1990s, the government has been systematically raising the lowest
minimum wages by a higher percentage than the higher minimum wages. We show that
minimum wages in Costa Rica have been maintained at relatively high levels with respect
average wages (the median is 55.5 percent) over this period. Moreover, unlike most of the Latin
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