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

wage in each industry as a percent of the average wage of covered sector workers in each
industry over the 1976-1992 period reveals that minimum wages have been fairly stable and
relatively high (the median is 55% of the average wage) when compared to other countries.
Hence, one would expect from the manner in which minimum wages are designed and changed
over time, that minimum wages would reduce inequality among Costa Rican workers in the
covered sector. Their impact on the uncovered sector depends on whether the labour market is
competitive or monopsonistic.

2. METHODOLOGY

2.1 Inequality

There are many ways to measure wage inequality; we have used three widely accepted
measures. First, the coefficient of variation,
n n —   — 2 ,

∑(Y (Yi - Y)² /n

CV = ^σj = Mi=i                                                     (1)

Y          Y

where Yi is the earnings/wage of person i in the population, n represents the number of people in
the population, and Y is the mean wage in the population.

The second indicator we use is the most common measure of wage inequality, namely the
Gini coefficient:

G= 1+ 1/n - 2∕n²Y [Y1+ 2Y2 + 3Y3+ ... + nYyn]
where n and Y as before, and Y1, 2Y2, ...nYn. is the individual income in decreasing order of size.

The third measure we have selected is the Theil mean logarithmic deviation:⁴

ⁿ

T = (¹/ ⁿ )∑ ^l°g(₄ /yJ

i=1

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