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

William Davidson Institute Working Paper 479

average wages) are gaining jobs. 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.

Notes

¹See for e.g., Brown (1999) for a description of this model.

²See for e.g., Card and Krueger (1995) and Rebitzer and Taylor (1995).

³In this paper we use the terms ‘informal sector’ and ‘self-employed’ interchangeably.

⁴For further definitions see Coulter et al. (1992).

⁵The seven industrial sectors are: agriculture, manufacturing, construction, transportation,
commerce and finance, services and domestics. Domestic servants were singled out since they
are a large group (about 10%) of the work force.

⁶Tests for other specifications of the equation indicated that neither the coefficients for the linear
toughness specification nor those for the lagged toughness specification were not significantly
different from zero for either sector.

⁷The turning point is when minimum wages were about 79-81 percent of the average wage in the
industry.

⁸The coefficient on toughness was not significant either in the linear specification or the lagged
specification (when the lagged term was entered in addition to the current term).

⁹Note that in the monopsonistic model a rise in the minimum wage results in an increase in
employment as the firm moves rightward along the supply curve of labour. The positive effect
will of course be reversed when one reaches the point of intersection of labour supply and
demand and further wage increases will result in a backward movement along the employer’s
demand curve.

12

<<   12   13   14   15   16   17   18   >>

More intriguing information