Legal Minimum Wages and the Wages of Formal and Informal Sector Workers in Costa Rica

changes. This implies that our results will not suffer from endogeneity/simultaneity bias that
exist in many studies which compare changes in a single minimum wage to changes in actual
wages.

IV. Data

For our analysis we combine information on legal minimum wages from the decrees,
published by the Ministry of Labor, with data on individuals from the annual Household Surveys
for Multiple Purposes, carried out by the Costa Rican Institute of Statistics and Census. The
household surveys have been conducted in July of every year since 1976 on approximately 1%
of the population. They include questions on earnings, employment, hours worked, job
characteristics such as industry, occupation, sector and firm size, as well as education, age and
many other personal characteristics of the individual in the household. We create a cross-
section/time-series data set for all individuals who worked in the private sector.¹³ In this paper
we use only data from 1988 and later because it is only in these years that the occupation
categories in the household surveys are sufficiently detailed to be able to adequately match with
the detailed occupation /skill/industry categories in the minimum wage decrees.¹⁴ We use data
on an average of approximately 10,000 workers in each year for twelve years (1988-1999).

Table 1 presents macroeconomic statistics on the mean real hourly wage and the mean
real hourly minimum wage from the Costa Rican Household Surveys (weighted by the number
of workers in each minimum wage category), the annual rates of GDP growth and inflation for
each year from 1988 to 1999. We point out that mean real wages closely follow macroeconomic
conditions in Costa Rica, increasing in every year except for two recessions in 1990-91 and
1995-96. Real minimum wages do not vary as much as actual wages, and are not as closely tied
to the business cycle. We also note that the average real minimum wages are relatively stable
from 1988 to 1994 and then increase each year from 1994 to 1999 (including the recession years
of 1995-96).

Figure 1 illustrates the structure of legal minimum wages in Costa Rica with histograms
of the minimum wage distribution. Specifically, the figure presents the distribution of real
of the National Salaries Council for the entire period that we study, stated that inflation was the “only” factor
considered in setting the average minimum wage increase.

¹³ Public sector workers are excluded from the analysis since their wages are governed by a different set of decrees.
Unfortunately, it is not possible to match individual observations in the Costa Rican household surveys across years
to create panel data.

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